Gold's status as a reserve asset for central banks and banks is on the rise. According to Bank of America, gold has surpassed the euro to become the second largest reserve asset after the dollar. More precisely, Bank of America should clarify that central banks in the eastern hemisphere are selling dollars and euros while buying gold and renminbi.

However, gold currently accounts for 16% of global bank reserves. The dollar accounts for approximately 58% of central bank reserves, a proportion that has dropped from over 70% since 2002.

Interestingly, the Polish central bank was the largest gold buyer in the second quarter of this year, insisting on having the gold they purchased delivered to their central bank rather than being 'held by another central bank.' Additionally, Turkey has been a major buyer of gold. Furthermore, several African countries have announced central bank gold purchase plans.

Although it may not happen this year or next, analysts predict that gold's position as a reserve asset may exceed that of the dollar, especially if the reports of BRICS countries considering introducing a gold-backed trade currency materialize. Russia will host the BRICS summit in Kazan, Russia from October 22 to 24. There are reports that discussions about a new trade currency are on the agenda.

On September 5, Russia announced that in the next month (starting from September 6), it will use unexpected oil and gas revenues to increase its daily gold purchases from $13.5 million to $93 million ($1.2 billion rubles to $8.2 billion rubles). The report was released by the Russian news agency Interfax.

The Federal Reserve has backed itself into a corner, facing significant pressure from the market and Wall Street to make large interest rate cuts. However, if it does so, it risks rapid selling of the dollar.

The USD index is currently testing the 100 level, which has been a technical support for gold since early 2023. If the Federal Reserve makes substantial interest rate cuts, the dollar is likely to drop to the 90 level, the mid-2021 level, which would propel gold to rapidly rise to $3000, and silver to $50.

First, this may accelerate global central banks getting rid of using the US dollar as a reserve asset. Equally important for the United States, a depreciating dollar and lower interest rates will make it more difficult to attract foreign investors to finance more US government debt, which has become a problem. Finally, the Fed knows that inflation is higher than what the CPI represents. Cutting rates will further push real interest rates into negative territory.

According to the CPI calculation, the 'real' interest rate is now positive. However, using the 1990 Consumer Price Index calculation, the current real interest rate is -3%, using the 1980 Consumer Price Index calculation, the current real interest rate is -6%. Negative interest rates will fuel price increases, which is also partially the reason for inflation 'stickiness'. Rate cuts will accelerate actual inflation.

This is why after the Fed cut rates earlier this month, gold has been hitting new historical highs almost every day, and why silver is about to break the $30 mark. Precious metals 'see through Powell's rhetoric as well as the strong economy and declining inflation rates, and also sense signs of the US resuming money printing'.