There are three certainties in life: death, taxes and the BIS – the central banks’ central bank – warning about excesses from monetary policy (the most recent amusing example of this was last October when as we wrote, “Fed Announces QE4 One Day After BIS Warns QE Has Broken The Market”). Actually, to this list of 3 certainties we can add one more: central banks roundly ignoring the warnings from the central bank mothership.
That, however, does not prevent the BIS from continuing this trend of warnings, and today the Basel-based organization did just that when in its Quarterly Review publication it cautioned that the surge in financial markets following COVID-19 vaccine breakthroughs and the U.S. election has left asset prices increasingly stretched.
Sounding surprisingly similar to Goldman, which as we reported earlier today issued an almost identical warning, when it observed that its sentiment indicator is now +2.0 standard deviations above average…
… which has left positioning extremely stretched and represents a 98th percentile reading since 2009…
In 2018, central banks added nearly 23 million ounces of gold, up 74% from 2017. This is the highest annual purchase rate increase since 1971, and the second-highest rate in history. Russia was the biggest buyer. And not surprisingly, the lion’s share of gold is flowing into central banks of countries that are in the sights of America’s killing machine—the Military Industrial Complex that Eisenhower warned us about in 1958.
The Bank for International Settlements (BIS), located in Basal, Switzerland, is often referred to as the central bankers’ bank. Related to this issue of central bank hoarding of gold is the fact that on March 29 the BIS will permit central banks to count the physical gold it holds (marked to market) as a reserve asset just the same as it allows cash and sovereign debt instruments to be counted.
There has been a long-term view that China and other nations dishoarding dollars in favor of gold have been quite happy about western banks trashing the gold price through the synthetic paper markets. But one has to wonder if that might not change, once physical gold is marked to market for the sake of enlarging bank balance sheets.
This also raises the question with regard to how much gold the U.S. actually holds as opposed to what it claims to hold. James Sinclair has always argued that the only way the world can overcome the debt that is strangling the global economy is to remonetize gold on the balance sheets of central banks at a price in many thousands of dollars higher. This would mean a major change in the global monetary system away from the dollar, as China has been pushing for the last decade or so.
If banks own and possess gold bullion, they can use that asset as equity and thus this will enable them to print more money. It may be no coincidence that as March 29th has been approaching banks around the world have been buying huge amounts of physical gold and taking delivery. For the first time in 50 years, central banks bought over 640 tons of gold bars last year, almost twice as much as in 2017 and the highest level raised since 1971, when President Nixon closed the gold window and forced the world onto a floating rate currency system.
But as Chris Powell of GATA noted, that in itself is not news. The move toward making gold equal to cash and bonds was anticipated several years ago. However, what is news is the realization by a major Italian Newspaper, II Sole/24 Ore, that “synthetic gold,” or “paper gold,” has been used to suppress the price of gold, thus enabling countries and their central banks to continue to buy gold and build up their reserves at lower and lower prices as massive amounts of artificially-created “synthetic gold” triggers layer upon layer of artificially lower priced gold as unaware private investors panic out of their positions.
The paper concludes that,
“In recent years, but especially in 2018, a jump in the price of goldwould have been the normal order of things. On the contrary, gold closed last year with a 7-percent downturn and a negative financial return. How do you explain this? While the central banks raided “real” gold bars behind the scenes, they pushed and coordinated the offer of hundreds of tons of “synthetic gold” on the London and New York exchanges, where 90 percent of the trading of metals takes place. The excess supply of gold derivatives obviously served to knock down the price of gold, forcing investors to liquidate positions to limit large losses accumulated on futures. Thus, the more gold futures prices fell, the more investors sold “synthetic gold,” triggering bearish spirals exploited by central banks to buy physical gold at ever-lower prices”.
The only way governments can manage the levels of debt that threaten the financial survival of the Western world is to inflate (debase) their currencies. The ability to count gold as a reserve from which banks can create monetary inflation is not only to allow gold to become a reserve on the balance sheet of banks but to have a much, much higher, gold price to build up equity in line with the massive debt in the system.
For almost a decade, global central banks have been avid gold buyers. Gold purchases by central banks in 2018 rose 36 percent over the previous year. Central banks are now holding 366 tons of the yellow metal. These gold purchases are the largest since 1971 when President Nixon ceased the gold standard and the tie between the U.S. dollar and gold, which rapidly led to the devaluation of the U.S. dollar.
Not every central bank has followed this trend. Venezuela, which is in the midst of an economic collapse, sold 25 tons of gold in 2018 in an attempt to repay its debts. But Venezuela is an exception. Other central banks are eager to increase their gold reserves as a hedge against economic uncertainty. Gold ownership by central banks is at a 50-year high as global purchases have increased 75 percent over the past year.
1. United States
The Federal Reserve holds the largest amount of gold of any other central bank, 8,133.5 tons. This is 75.2 percent of its foreign reserves. The Federal Reserve has not been as active in the gold-buying spree as other countries in an effort to keep the dollar from devaluing.
2. Germany
Germany’s central bank has been busy repatriating 674 tons of gold from the Banque de France and the Federal Reserve Bank. During the Cold War, the country’s closeness to what was then Russia-controlled East Germany drove Germany to store its gold with other countries. Now, the Deutsche Bundesbank is calling its gold back home. This move is expected to be completed by 2020. Germany currently holds 3,370.0 tons of gold, which account of over 70 percent of its foreign reserves. Germany, which experienced hyperinflation in the 1930s which saw the Deutschmark become valueless, has learned its history lesson.
3. Italy
Italy plans on holding on to its 2,451.8 tons of gold. The Bank of Italy has stated that it considers gold a safe investment in times of economic turmoil and a safeguard against the volatility of the U.S. dollar. Gold represents 67.9 percent of Italy’s foreign reserves.
4. France
France has gradually ceased selling its gold reserves in an effort to hold on to the 2,436.0 tons of gold it currently has. This amounts to over 60 percent of the country’s foreign reserves. Marine Le Pen, leader of the National Front Party, has advocated for a freeze on the sale of gold, as well as repatriation of all of France’s gold currently being held by foreign countries.
5. Russia
The Russian Central Bank has been bullish on gold for six years. In 2017, it overtook China to become the fifth largest holder of gold reserves. Much of this is due to trade tensions between the U.S. and Russia. Two years ago, Russia purchased 224 tons of gold and sold off much of its U.S. Treasury debts. This move is seen as a defensive effort to weaken the U.S. dollar as the top global reserve currency. Currently, Russia holds 2,119.2 tons of gold in reserves. The Russian Central Bank is leading the way in gold purchases in its efforts to devalue the dollar.
Since the U.S. placed economic sanctions against Russian, its central bank has been accumulating gold as a safety net against having its assets frozen. In 2018, it purchased 8.8 million ounces of gold.
6. China
China, which currently holds 1,864.3 tons of gold in reserve, a low amount among the leading gold-holding countries, but there have been many reports that the country has left some of the gold purchases off its books. However. China is expanding its reserves slowly. It is also the leading producer of gold in the world.
Global central banks now hold the greatest share of the world’s gold, approximately 33,800 tons. Gold has been a critical diversification tool, a safety hedge against inflation, or as collateral for loans.
Central banks in Austria and Switzerland have also indicated that they consider gold an essential reserve against future emergencies. The Polish central bank expressed the fact that their gold reserves allow diversification and greater independence and less reliance on the financial stability of other countries.
Sweden, Greece, and Portugal have expressed the same sentiments. Gold is a haven of safety during economic turndowns.
Goldmoney Research@GMoneyResearch
Countries have held #gold as a reserve asset throughout history…
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The world’s central banks are counting on the power of gold to help them through bad economic times. Is this something investors should be thinking about, as well? The current economic growth experienced around the globe is expected to come to an end, as all economic upswings do. Some economists are predicting a recession by 2020. In the event of such an occurrence, investors should be position by having a proven hedge during bearing times.
