According to recently released data by the World Gold Council (WGC), as of September 2021, the total amount of gold held in reserves by central banks globally exceeded 36,000 tons for the first time since 1990. This 31-year record was the result of the world’s central banks adding more that 4,500 tons of the precious metal to their holdings over the last decade and it provides ample support for the investment case for gold, in both directly performance-related terms, but also from a big picture perspective.
This new record went largely underreported in the mainstream financial press and almost entirely unmentioned in official central bank statements and their guidance or policy commentary. Quite to the contrary, policymakers in the US, the Eurozone and in most other major economies, have for over two years now insisted on repeating the exact same talking points and all kinds of arguments and convictions that would in fact nullify the case for holding gold at all.
For example, up until very recently, inflation was largely and decisively dismissed as “transitory”, with leading figures from the Fed and the ECB repeatedly assuring investors and the public at large that consumer prices were under control and that the early hikes we saw last year in official data were nothing but a glitch. Of course, as the pressures continued to build and as it became clear that the CPI figures (that are already a very poorly constructed and misleading gauge of inflation) were not aligned with the version of reality that central bankers publicly espoused, they were forced to perform a policy U-turn, at least in theory if not in practice. However, the most important element to note here, is that if their public statements were actually consistent with their policymaking and strategic outlook, there would be no conceivable reason to ratchet up their gold stockpiling.
Naturally, this is far from the first time we see this kind of dissonance between words and actions by officials and institutional figures of all sorts, not just central bankers. This is why investors need to pay attention to the practical steps that are actually taken, and largely ignore the rhetoric that surrounds, or often even conceals, those steps. As the old saying goes, “do as I do, not as I say”.
And while inflationary risks are very much on top of most conservative investor’s minds, there is also a much larger, long-term shift that the gold buying spree highlights: The reign of the dollar as the world’s reserve currency is slowly but surely coming to an end. The greenback’s value has seen a remarkable decline against gold over the last decade and it’s not just precious metals investors that are keeping a close eye on this trend. Reinforced by solid geopolitical reasons, central bankers in Russia, China and other aligned nations have been pushing for years already to dethrone the USD.
It has certainly been an uphill battle, and the US currency still undoubtedly dominates all others in International trade and in reserves, however, this campaign against it appears to be relentless. In fact, it might have reached an important milestone a few weeks ago: according to a report by the Central Bank of Russia that was analyzed by Bloomberg, last year, the nation’s central bank gold holdings surpassed its dollar reserves for the first time in its history, with gold making up 23% of total reserves as of the end of June and dollar assets dropping to 22%.
Meanwhile, many other nations have also been accelerating their gold buying and shedding their dollar reserves, and that is particularly true of Eastern European and Asian emerging economies. Just within the first nine months of 2021, Thailand added around 90 tons, India 70 tons and Brazil 60 tons. As was highlighted in a recent analysis by Nikkei Asia, “The presence of the dollar in foreign exchange reserves is falling, in contrast with the growth of gold. In 2020, the currency-by-currency ratio of the dollar fell to the lowest level in a quarter of a century.”
All in all, it is essential for investors to pay close attention to this shift. As central bankers themselves also clearly understand, as fiat currency debasement continues and even accelerates in the coming months and years, physical gold is set to provide the only reliable and time-tested haven from the storm that lies ahead.
Claudio Grass, Hünenberg See, Switzerland
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