Nations in the mBridge Project Are Stockpiling Gold, Driving Up Prices

 

Countries that participate in the novel cross-border payments system mBridge are each hoarding gold and are largely responsible for the bull market of the past two years.

How and when the global dollar standard will disintegrate is hard to predict, but setting up a non-dollar payments system (mBridge) and aggressively accumulating gold to replace U.S. Treasuries as the prime international reserve asset is a potent strategy to de-dollarize.

mBridge: An Instant Cross-Border Payment System

MBridge is an international payments project that was launched in 2021 by the Bank for International Settlements’ (BIS) Innovation Hub in Hong Kong. Currently, there are five full members—Thailand, China, Hong Kong, Saudi Arabia, and the U.A.E.—and over 30 observing members. 

The project aims to create a multi-central bank digital currency platform for participating central banks and commercial banks, built on distributed ledger technology (DLT) to enable instant cross-border payments and settlement. MBridge uses an Ethereum-compatible DLT network, the mBridge Ledger, developed by China’s Digital Currency Research Institute. Because China oversees the backbone of the technology, it’s immune to Western sanctions.

A common technical infrastructure has the potential to improve the current system and allow cross-border payments to be more efficient, immediate, and cheaper. On June 5, 2024, mBridge reached the Minimum Viable Product (MVP) stage.

A Surge in Gold Hoarding by mBridge Members

Readers who are familiar with my writings understand that the gold price is determined by global flows. Based on cross-border trade statistics, it’s clear that the East assumed dominance in the gold market starting in 2022, overtaking the West.

As stated in a previous article, formal gold import and export statistics represent private flows, but they can also reflect central bank activity. Aside from elevated peaks in private demand from China and Thailand, the Chinese and Saudi central banks (PBoC and SAMA) are largely responsible for the rally that commenced in 2022, both having vigorously stepped up gold purchases after the West froze part of Russia’s foreign exchange reserves.

Strikingly, according to available trade data, the countries in the driver’s seat of the gold market are all full members of mBridge: China, Saudi Arabia, Thailand, and Hong Kong (see chart below). Statistics by the U.A.E. lag several years and are misleading due to smuggling to India.

Chart 1. Net gold import data through May 2024 reveals gold stockpiling amid higher prices.

Chart 2. The Treasury Inflation Protected Security (TIPS) yield is the expected real interest rate on U.S. government bonds. Strong gold buying by the East has broken the correlation and rendered TIPS impotent.

Between China, Thailand, Saudi Arabia, and Hong Kong, it’s clear their gold stance has changed since early 2022: they’ve jettisoned their sensitivity to the price. Instead of selling into rallies, they are themselves causing those rallies as a result of strong demand.

Aside from visible global gold flows, we know the official gold reserves of Thailand, the U.A.E., China, and Saudia Arabia are rising in recent years—even when excluding covert purchases by the latter two. Only Hong Kong’s monetary gold has been flat; however, it can be lumped in with Beijing since it’s a special province of China.

Chart 3. The Central Bank of Thailand has increased its reserves to 235 tonnes from 84 tonnes in 2008. In the U.A.E., official gold assets went up from zero to 75 tonnes over this time span. PBoC and SAMA gold reserves are much higher than disclosed.

mBridge Helps Facilitate a Ditching of the Dollar

The dollar is said to be the world reserve currency, which means it’s the most used currency in global trade. The lion’s share of global international reserves (owned by central banks) are held in dollar-denominated assets such as U.S. government bonds (USTs). Nations wanting to break free from the dollar need an alternative for trade and reserves.

As described above, the members of the mBridge fellowship—all running a current account surplus—have been increasing their gold reserves in recent years. This is referred to as Gold Recycling: storing trade surpluses in gold rather than USTs.

Chart 4. A visualization of the Gold Recycling trend. World official gold reserves are estimated based on reported and unreported purchases by central banks.

Getting rid of the dollar in trade is more challenging. Liquidity in local currencies can be poor; volatility can be risky with limited hedging opportunities, transactions slow and expensive, and payment infrastructures incompatible.

MBridge is about connecting central banks to provide a settlement layer for their digital currencies while supporting interoperability between participants’ existing financial infrastructures. Utilizing mBridge is a stepping stone for more use of local currencies and, eventually, an improvement of liquidity.

Courtesy of BIS Innovation Hub (2022). Saudi Arabia was the last member to join in June 2024.

Cross-border payments often rely on an inefficient network of correspondent banking. Through mBridge, though, its participants seek to do away with correspondent banking and let banks link up efficiently through the new settlement rails. According to the BIS, mBridge payments are faster, safer, cheaper, and more accessible, and settlement is final.

Courtesy of the Hong Kong Digital Currency Academy.

mBridge Facilitates New Non-Dollar Trade Deals

Energy is the lifeblood of any economy, and Saudi Arabia and China are the largest exporters and importers of oil, respectively. For a long time, the House of Saud preferred to receive dollars in return for oil, based on an agreement with the United States to invest its trade surplusses in USTs*. Despite their long-standing ties with the U.S., the Saudis are becoming eager to trade oil in other currencies.

In November 2023, the PBoC and SAMA signed a currency swap agreement worth ¥50 billion yuan ($7 billion dollars) to “expand the use of local currencies between China and Saudi Arabia and facilitate trade and investment between the two sides.”

This September, the Saudi Minister of Mineral Resources, Bandar Alkhorayef, said in an interview with SCMP that he’s open to new ideas, including the use of renminbi in crude oil settlements. No wonder the Saudis joined mBridge in June.

The PBoC also renewed a currency swap line with with the U.A.E.’s central bank (CBUAE) in November 2023 and, at the same time, solidified a digital currency cooperation agreement as part of ongoing teamwork for mBridge.

As it has reached the MVP stage, mBridge is slowly becoming fully operational. A few weeks ago, as an example, RAKBANK in the U.A.E. executed its first instant cross-border payment—digital dirham against digital yuan—using mBridge.

In May 2024, representatives of the Thai central bank and the PBoC signed a Memorandum of Understanding “on strengthening banking and financial cooperation, including the promotion of local currency usage as well as cross-border payment and settlement,” an apparent reference to mBridge.

The Combination of Gold & mBridge Could Tank the Dollar

What are the odds that the countries that have taken over the gold market in the past two years are also in a non-dollar trade alliance? Surely, these countries have a thought-out plan to de-dollarize.

Noteworthy, China, Hong Kong, and the U.A.E. have sophisticated precious metals markets where gold is traded in local currency, allowing mBridge associates to convert any surpluses from bilateral trade directly into gold while bypassing the dollar.

Saudi Arabia doesn’t have a developed gold market, but not long ago, a new refinery was opened in Riyadh under the patronage of the Saudi Minister of Mineral Resources, Bandar Alkhorayef. On the refinery’s website, it reads gold bars will “comply with globally approved standards and should be accepted globally by all customers, including all national banks.” That should tell us enough.

One requirement for mBridge to come to fruition is the completion of the digital local currencies, most of which are currently still in a pilot phase. It should be clear, though, that mBridge constituents are being finalized and coming together.

MBridge is likely to become a success because there is a political motive to escape from the clutches of the weaponized dollar if the mBridge group is able to take over the gold market, who knows what they can do on the cross-border payments front?

As we keep track of developments in cross-border payments through local currencies, the rise of gold to the detriment of the dollar in global reserves is inescapable.

Global Gold Reserves Flipping from Dollars into Gold

My personal calculations suggest gold is currently making up 19% of international reserves, up from 10% in 2014. Meanwhile, the dollar’s share has fallen from 62% in 2001 to 48% in March of this year as a result of the Gold Recycling trend (see charts 4 and 5).

Chart 5. Gold is taking over market share from the dollar in global international reserves.

Since geopolitical tensions aren’t subsiding and the mBridge group has a motive to de-dollarize, we can assume this trend will continue. And we shouldn’t rule out Western investors will join in driving up the price of gold.

The dollar won’t die overnight, yet its slow demise is worth evaluating relentlessly**. I will keep readers posted on the composition of international reserves and developments in the cross-border payments arena.

*A “petrodollar” deal in which the Saudis exclusively accept dollars for oil has never existed between the U.S. and Saudi Arabia.

**Not mentioned in this article is that there is also a lot of dollar debt internationally due to the Eurodollar market. 

 

 

mBridge 

Bucking Gold Repatriation Trend, Argentina Sends More Gold to London

 

In July, the Central Bank of Argentina (BCRA) shipped another 3 tonnes of gold to the U.K. to swap for foreign exchange. A month prior, BCRA also transported 3 tonnes to the U.K. BCRA is now estimated to have 37 tonnes (60% of Argentina’s gold reserves) on swap in the London Bullion Market.

Argentina Is Leveraging Its Physical Gold

Argentine newspaper Clarín reported in 2017 that BCRA moved 11 tonnes of its monetary gold to London, according to their research, to be swapped out for Japanese yen. “We are already doing this with all the gold we have in London, because by placing it in that financial center, we can expand its use,” the central bank told to Clarín at the time.

El País reported in July of 2024 that BCRA was again transporting gold abroad. After rumors were making rounds about how much gold was shipped out and to where, President Milei hinted that the gold was used overseas as collateral for a loan (this is how a swap typically works). Argentina appears to be in need of foreign currency to pay interest or to pay off debt.

Argentina Sends More Gold to London

A few weeks back, I was able to confirm BCRA had sent $150 million worth of gold (3 tonnes) to the U.K. in June, based on cross-border trade statistics. Because officials had confessed that part of the Argentinian monetary gold was sent abroad, and for the first time ever the U.K.—home of the largest gold market globally—recorded to have imported 3 tonnes from Argentina that month, I was confident this batch could be assigned to BCRA.

Monetary gold can cross borders outside the scope of customs statistics, which apparently happened in 2017. However, if a central bank lets a bullion bank take care of the shipping, the bullion bank has to deal with customs, and the gold will show up in trade data (as was the case with the secret purchases by Saudi Arabia’s central bank in recent years).

In the same spirit, new trade data from the UK shows another import of 3 tonnes from Argentina for July. It looks like BCRA is sending more and more gold to London in a desperate need for foreign exchange.

Most of Argentina’s Gold Is Now Held in London

Bloomberg recently wrote that, according to its sources: “before the move, about half of Argentina’s gold was in domestic vaults with the other half in London.” Bloomberg speculated there was only one shipment of gold to Europe, which would be the one in June.

So, before June, half of BCRA’s total gold reserves (62 tonnes) were in London. Adding 6 tonnes transferred in June and July means there are now 37 tonnes abroad, which equals 60% of Argentina’s monetary metal.

If Milei succeeds in getting Argentina’s finances in order, international debt can be repaid and foreign exchange obtained through trade can be used to unwind the swaps. If not, BCRA could default on its swap obligations and thereby surrender ownership of 36 tonnes of precious metal.

 

 

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Saudi Central Bank Caught Secretly Buying 160 Tonnes of Gold in Switzerland

 he Saudis have joined other Asian countries in ditching their long-term sensitivity to the gold price. Evidence suggests the Saudi central bank has been covertly buying 160 tonnes of gold in Switzerland since early 2022, contributing to the current gold bull market.

Although the Saudis played a key role in the birth of the global dollar standard in the early 1970s, this time around they might even become a lynchpin for its dissolution.

Introduction

Until recently, Saudi Arabia’s gold demand would decline when the gold price went up and strengthen when the price went south. This dampened volatility in the gold market, which for many decades was ruled by the West.

Ever since the West immobilized Russia’s dollar assets in February 2022, those with diplomatic disagreements with the West are increasingly exchanging their dollars for physical gold. Saudi Arabia is the latest country—after China and Thailand—of which I have found cross-border trade statistics showing it has shifted from being price sensitive to a price driver.

As the chart above reveals, when the gold price went up (2016, 2017, 2019, and 2020), the Saudis cut back imports or became net exporters. Since 2022, however, the gold price has escalated, yet Saudi Arabia continued to import gold.

During the entire rally from late 2022 until present, the Saudis have been a constant net importer which has boosted the gold price. The icing on the cake is that part of the flow into Saudi Arabia, the gold coming from Switzerland, actually goes to the Saudi central bank, aka the Saudi Arabian Monetary Authority (SAMA).

Exposing Saudi Central Bank’s Hidden Gold Buying

Formally, any country’s cross-border gold trade statistics refer to “non-monetary” metal, meaning privately owned. Monetary gold—owned by central banks—is exempt from being disclosed in trade numbers. As I have demonstrated in a previous article, though, the non-monetary gold crossing the Chinese border is often a shipment heading for the vaults of the People’s Bank of China (PBoC) regardless.

Among industry insiders, SAMA is known for having accelerated secret gold purchases since 2022. By comparing the World Gold Council’s (WGC) estimates of total central bank buying (based on field research), to what central banks report to have bought to the International Monetary Fund (IMF), we can conclude “unreported” purchases went through the roof starting in 2022. People familiar with the matter, but who prefer to stay anonymous, told me this is largely due to the PBoC, and to a lesser extent SAMA. That’s clue number one.

The gap between WGC and IMF data reflects unreported purchases.

Because gold Exchange Traded Funds (ETFs) hardly exist in Saudi Arabia, we can estimate SAMA purchases by comparing net imports to local consumer demand. Not coincidentally, net imports began to consistently outpace consumer demand in the second quarter of 2022, right after the Ukraine war started. SAMA was (and is) in a hurry to get its hands on physical gold.

Discrepancies between consumer demand and net imports can also arise from dealer inventory changes and scrap supply, data that is unfortunately not publicly available.

A source once told me that central banks often buy gold in Switzerland and London and have bullion banks pack and ship the gold to wherever the central banks want. This way it shows up in cross-border trade data because the bullion banks have to deal with customs.

Switzerland Pinpointed as Ground Zero for Secret Purchases

To find out if SAMA shops for gold bars in the Swiss Alps, I have subtracted Saudi consumer demand from its net imports and compared the outcome (gold imported but not sold to consumers) to gross exports from Switzerland to Saudi Arabia. The result shows a strong match since Q2 2022, confirming SAMA has quietly been buying gold in Switzerland.

Any differences between the blue and orange bars is mainly due to scrap supply, a draw on net imports, which likely was substantial in 2020.

Saudi Arabia Owns Way More Gold Than It Wants Known

The data suggests SAMA bought approximately 160 tonnes of gold in recent years (and it was likely also buying in 2015 in Switzerland). How much it holds in total is unknown to me, partly because Saudi gold trade data only starts in 2015. What happened before that is up for grabs. Neither do I know how much additional gold SAMA might be buying elsewhere.

One thing is for certain: Saudi Arabia owns much more gold than it wants the world to believe.

The last time the Saudi central bank updated its official gold reserves was in February 2008, when it conveyed to hold 332 tonnes, which was 180 tonnes more than in January 2008. Obviously SAMA didn’t buy 180 tonnes in one month.

Past and current data indicate Saudi Arabia central bankers do not report changes to their gold holdings in a timely fashion. What will their next bulk update show?

Just like the reported gold reserves by the PBoC, the number put out by SAMA is purely political. By hiding how much precious metal the nation truly owns, the House of Saud avoids openly upsetting the United States.

But the evolution of countries in Asia storing more and more of their trade surpluses in gold—a time-tested neutral and sanction proof reserve asset—is clear. Next to 160 tonnes by SAMA, I calculate the PBoC bought 1,600 tonnes since the war in Ukraine. Both central banks, the former of the most influential country in the oil market and the latter of the second largest economy globally, must be confident in what direction the gold market is headed.

How the above ties into other concerted initiatives by Asian nations to bypass the U.S. dollar, we will discuss in the next article.

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