Uzbekistan is one of the lesser-known countries of Central Asia. This ancient country which was once retiring place for traders passing through the historic silk route houses a living museum called the walled city of Khiva which is protected by UNESCO and also inhabited by Uzbek citizens. Its Mosuleums have been painstakingly restored to their original beauty. But as the political upturn took place in 2016 with Shavkat Mirzoyeyev becoming the President who envisages new reforms that will modernize the Uzbek economy, the country is soon to get a new identity distinct from its well-preserved heritage.
Long ago this country made headlines when in Tashkent, the Indian President Shri Lal Bahadur Shastri was foubd dead in mysterious circumstances. It seems unusualness is closely related to this country as recently Uzbek government is buying sovereign bonds of the US and China inspite of its huge gold reserves while the rest of the world is in for a goldrush.
While people elsewhere in the world are finding a strong case for holding gold, the Uzbek government is spending millions on finding and extracting gold to exchange it for the US and Chinese sovereign bonds. “We want to buy U.S. paper and the debt of other countries, including China,” Nurmuratov, said in an interview in St. Petersburg, Russia. “The share of gold is near 50%, but in the future, it can be lower.” He clearly wants to diversify nations $26 billion International reserves away from the yellow metal.
In stark contrast, the Central banks elsewhere in the world have resorted to aggressive gold buying, and anti-US sentiments can be said to be its root cause. People are not bullish about gold in particular but they are seriously thinking of disinvesting from US treasury bills due to its mounting debt anf fearing delinquency. The central banks backed the purchase of as much as 651.5 tonnes of gold in 2018 versus 357 tonnes in 2017.
Russia was the major buyer becuase it wanted to reduce its dependence on the greenback. Turkey too requested its citizens to hold gold to revive its sluggish economy and highly devalued lira as it suffers hyperinflation. As more and more countries are getting involved in trade wars and seeing their domestic currency pushed downhill, not buying dollars comes as an obvious step as a higher demand for USD will make their currency relatively less valued and imports highly unaffordable.
Fewer dollars, fewer treasury bills and more of gold to support the dwindling currency. This gold bugging has reached even higher levels in 2019 as investors fear political risks, economic recession, and power upturns. The coming year will see major events like the US presidential election, European parliamentary elections, BREXIT, the economic and geopolitical drama is nowhere close to its end.
The main reasons for yellow metal shining even brighter are mounting government debts and deglobalization. The US government passed an Act in 2017 which reduced tax liability for Americans but the benefits or transfer payment in the form of Medicare, social security schemes remained unchanged. The US government resorted to financing the additional expenditure by borrowing in the form of Treasury bills. To stimulate the economy further Fed has adopted an expansionary monetary policy with the exception of keeping the interest rates constant this time.
It is believed that lower interest rates do not make only loans cheaper for businesses to borrow and invest but it also makes parking money into bank accounts less profitable so the people resort to buying. The increase in demand acts as a catalyst for growth. And this phenomenon is widely common, even India’s debt to GDP ratio has increased over a year due to populist policies. This forms the basis for future inflation. And we know that inflation means currency losing its value but metal retains it for years.
Even after abandoning Gold standard, USD has remained a major reserve currency which made it easy for the US government to acquire funds at low-interest rates. But recent ups and downs like US-China trade war, Saudi Arabia’s increasing interest in China and yuan, Russia coming to support of outcast Venezuelan President Maduro which was supposed to be US’s backyard, China acing its checkbook diplomacy and marketing its role as an uplifter, puts USD under threat and ultimately the US bonds losing its lucrativeness as an investment option. It is obvious that such drastic possibilities will take time to turn into reality but with every investor thinking on these lines expectations will be self-fulfilling.
So today, the Central banks that are disinvesting from treasury bills are highly doubtful about the US’s ability to pay its debt. And if OPEC fires petrodollar then the game will be over in one night. Because of various risks and simply the idea of the US losing its reserve currency status, gold’s role as a store of value, an asset, and an alternative currency when your own currency is worthless has come into play.
In such a situation, Uzbekistan is underestimating its bargaining power as a country that houses Muruntau mine that is the world’s largest open gold pit. It has to think on lines whether it is always beneficial to follow the league or understand the turn of events and get things under our control when everyone else has gone wrong.
(Written by Pratigya for The Connectere)