Asian States Selling USD, Buying Gold

Many countries in Asia and authoritarian governments that are at loggerheads with the US are stocking up on gold to reduce their dependence on the dollar.

These countries are hoping to hedge against risks related to the prospect of US President Donald Trump taking an even more hard-line diplomatic posture in the run up to US midterm elections in November, Nikkei reported.

Gold is a "stateless currency" that can be converted into the monetary unit of any country and is a highly liquid asset. Many countries are selling their dollars for gold to reduce their vulnerability to Trump's unpredictable diplomatic actions.

In Asia, Southeast and Central Asian nations have been especially keen to ramp up their gold holdings. The Philippines had 196.4 tons of gold at the end of June, up 20% from 2010. Indonesia's overall gold holdings increased 10% during the period to 80.6 tons.

Since the Asian currency crisis in 1997, many Asian countries have been making steady efforts to slash the greenback's share in their financial assets. Gold has been one of the non-dollar assets they have built up in the process.

Itsuo Toshima, a market analyst, points to growing international concerns about the possible consequences of Trump's tax cuts. "Currently, the US economy is in very good shape because of the positive effects of the tax cuts, but the time will come when the US will face negative consequences of the measure," Toshima predicted.

"The US government may be forced to increase debt issuance due to deteriorating fiscal health, and that will raise concerns about a bad rise in interest rates and the risk of damaged confidence in the dollar."