Often at the mercy of the dollar, emerging countries are looking to insulate themselves from the vagaries of U.S. Federal Reserve policy by shifting to gold—and away from the greenback.

This shift in their currency reserves poses a distinct risk to Americans, who benefit from the willingness of other countries to swap their goods in exchange for U.S. legal tender. If more nations trade among themselves using other currencies such as the Chinese yuan, the U.S. Treasury will be forced by this “de-dollarization” to pay higher interest when borrowing from foreign creditors.

Now, it appears developing countries are indeed looking to lower their dependence on the dollar, according to the results of an annual survey of central banks conducted by the World Gold Council and published on Tuesday.

The industry association, which represents some of the largest miners of the metal including Barrick Gold, Newmont, and AngloGold Ashanti, discovered a “gulf in thinking” between the monetary policymakers in advanced economies and those in developing markets. The outcome has major implications for the United States and its ability to fund large and persistent trade deficits—and therefore American living standards.

“This divergence of views is perhaps most striking in terms of the outlook for the U.S. dollar and gold,” the World Gold Council’s annual report said. Developing economies, which the group says have been the primary driver of gold buying since the 2008 global financial crisis, “appear to be more pessimistic about the U.S. dollar’s future and more optimistic about gold’s.”

Part of the reason for this gulf in thinking is the instability large swings in U.S. interest rates can have on emerging economies. When the Fed’s rates are near zero, foreign investors tend to shower emerging markets with money, fueling growth but also inflation.

When the Fed then reverses course, as it did last year with a series of interest rate hikes, these same investors swiftly divert their flow of funds back to U.S. shores, often sparking a recession, or worse a currency crisis in these more fragile economies.

As the Richard Nixon administration’s famous adage goes, “The dollar is our currency, but it’s your problem.”

Spillover effects

While Americans’ attention has been diverted to the recent run on regional banks and the debt ceiling negotiations, it’s often forgotten that the rest of the world is just as heavily affected by the decisions of Fed Chair Jerome Powell.

“The foreign spillovers of higher U.S. interest rates are large, and on average nearly as large as the U.S. effects,” economists writing for the Federal Reserve determined six years ago. “A monetary-policy-induced rise in U.S. rates of 100 basis points reduces GDP in advanced economies and in emerging economies by 0.5% and 0.8%, respectively, after three years.”

The only sustainable solution for these emerging countries is to reduce their exposure to Fed policy by reducing their reliance on the dollar as a means to conduct trade with their neighbors. This would then become evident in shrinking share of U.S. dollar reserves.

When asked by the World Gold Council how the share of global reserves will change over the next five years, 58% of emerging market central banks responded by saying those denominated in dollars will fall, while 68% forecast those in gold will rise. Only a fifth believed they would remain unchanged from current levels.

By comparison a solid majority of central banks representing advanced economies expect the status quo for both will continue.

The underlying frustration of being the collateral damage in the Fed’s fight against inflation has been further exacerbated by the G7’s economic sanctions imposed on Russia for its war in Ukraine. Some emerging countries fear this tool could be wielded against them as well should they ever fall out of line with the industrialized West.

These two factors—sanctions and de-dollarization—offered the most glaring differences in opinion about the most relevant reasons to own gold reserves. A full 25% of emerging market central banks cited concerns about sanctions—a new question that was added to the survey this year—while 11% said it was part of a dedicated de-dollarization policy. Not a single advanced economy saw either as relevant.

Last year, 20% of overall respondents cited de-dollarization as playing either a marginally relevant or somewhat relevant role. This year that surged to 38%, of which 4% now said for the first time it was even “highly relevant.”

Overall, 71% of all survey respondents believed global central bank gold holdings will rise in the next 12 months compared with 61% last year and just 52% in 2021.

While central banks are major players in the gold market, helping provide support to the price of gold that surged recently to a record high above $2,000 an ounce, central banks do not buy for the purpose of speculation. Instead they keep it primarily as an inflation hedge and a store of value.

According to the World Gold Council, net purchases by central banks totaled 1,136 metric tons in 2022. This marked not only the 13th consecutive year of net purchases, but also the highest level of annual demand on record back to 1950. The Central Bank of Turkey reported the largest buying, with its official gold reserves swelling by 148 tons.