Montreal, Canada

Last week, Russia's central bank revealed that it purchased Canadian dollars to supplement its expanding foreign exchange reserves – mostly in dollars and EUR.

The move marks a growing trend in the cash-rich emerging markets whereby central banks are boosting reserves in natural resource currencies and gold since 2009.

The Canadian and Australian dollars are long-term beneficiaries of rising commodities prices and China's massive appetite for raw materials. Both countries also maintain less leverage in their domestic banking markets and escaped the wrath of the credit crisis affecting the United States and Europe.

Some central banks, like India, Russia and China continue to boost their gold holdings.

In November, India purchased 400 metric tons at roughly $1,050 an ounce – the biggest single purchase by a central bank. For the first time in years central banks are now net buyers of gold; in the 1990s Western central banks were among the heaviest sellers; today, it's the emerging markets accumulating gold.

Like most central banks in Asia, gold as a percentage of central bank holdings remains small. India holds just 7.5% of its reserves in gold – among the highest ratio in emerging Asia. China, however, holds only 1.6% of its reserves in gold. Other regional banks like South Korea (0.2%), Singapore (2.4%), Japan (2.7%) and Taiwan (4.4%) also hold pitifully small positions compared to the United States and Germany.

From a contrarian's perspective, however, it's worth noting that central banks historically have the worst market-timing schedule. Whether current gold purchases mark a top in the primary trend or a sustainable long-term accumulation phase is debatable. The track record does not support central bank market timing.

This time, however, I think central banks have it right. The credit crisis marks the beginning of the end of American financial hegemony with the Chinese increasingly calling the shots and assuming big stakes in cross-border deals. In 2009, more Chinese IPOs hit the market then New York and London combined. China also essentially controls the Treasury market with an inventory of T-bonds as far as the eye can see.

The right thing for central banks to do – and all investors for that matter – is to reduce dollars and other fiat paper for gold. The debt super-cycle exploded in 2008 and has yet to fully run its course because of government bailouts.

In the late 1990s many developed economy central banks dumped gold as prices approached a bear market low. Britain ranks as one of the worst market-timers, dumping its gold under $300 an ounce. At the same time, Persian Gulf central banks also began accumulating U.S. dollars just as the buck peaked in late 2001.

Some of the worst violators in the gold market were gold-producing countries like Canada and Australia – both dumped gold in the 1990s. Even Switzerland sold gold in the 1990s.

Russia is right to reduce its U.S. dollar holdings. And India and China are right to boost gold reserves. Beyond a counter-trend bear market rally that can last months, there's no compelling long-term case for the dollar or most foreign currencies in the age of monstrous deficits and central bank printing to arrest deflation. Paper money is a bad idea that is approaching crisis proportions.