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Central Banks are Stockpiling Gold – Anticipating a New Gold Standard?
The big news in the first week of May was that the Federal Reserve left interest rates unchanged. Pundits sold gold on the anticipation of that announcement last Wednesday (May 3), and then gold stayed down as the news was released. This is in sharp contrast to the quick recovery of gold prices after the last three Fed interest rate increases – in December 2015, December 2016 and March 2017, as shown in this chart:
In leaving rates alone, the Fed indicated that the current economic slowdown was “temporary,” so they might decide to raise rates in their next meeting of the Federal Open Market Committee in mid-June. If gold follows its previous intra-meeting behavior, gold would move sideways or slightly down the next six weeks, followed by a sharp increase if the Fed chooses to raise interest rates in their June FOMC meeting.
As we have often said, this is an irrational reaction by traders – but we must live with the gold market we have, not the one we wish to be, or the one that fits our contrarian logical analysis! Gold has risen after the last three rate increases – and during the 17-rate increases of 2004 to 2006, the previous rate-rising cycle at the Fed – but supposedly intelligent pundits keep telling us gold will fall if the Fed raises rates!
The mainstream gold pundits are also missing a much bigger trend – the central bank gold buying of the last decade (most notably in Russia and China), along with the lack of selling by the established central banks of Europe and North America. You would think that rich countries overridden with budget deficits would sell some of their gold assets, but U.S. and European central banks have held onto all their gold.
In fact, it might surprise you to realize that the bulk for foreign exchange reserves in Europe and America are dominated by gold – not bad for a metal economist John Maynard Keynes called a “barbarous relic.”
The top four gold-holding nations are the U.S., Germany, Italy and France, each with over 64% of their foreign exchange reserves held in gold. Next in line are two emerging giants with smaller gold holdings – China and Russia – but those two nations are rapidly playing “catch up” with Western central banks.
The U.S. Treasury holds over 261 million Troy ounces of gold, worth about $327 billion at $1,250 per ounce. In the last 40+ years, this total has remained constant. The nations of Germany, Italy and France hold a combined 8,265 tons, slightly more than the U.S. holdings. Through wars and deficits, the U.S. (and most of Europe) have NOT sold their gold to pay current bills or diversify into other currencies. That alone says that the central banks of America and Europe still respect a kind of “Gold Standard Lite.”
But the big story is the rapid buying of gold in Russia and China over the last decade. The Russian central bank has quadrupled its gold holdings in the last decade – from about 13 million Troy ounces in 2007 to 52.9 million ounces as of January 2017, as of their latest official announcement. (The Russian central bank bought one million ounces of gold in January after buying no gold in December of 2016.)
China is more secretive about its gold buying. In addition to being the world’s largest producer of gold from mining operations, China is also a major importer of gold. Imports of gold to mainland China from Hong Kong more than doubled in March 2017, according to data released by the Hong Kong Census and Statistics Department. China’s gold imports from Hong Kong rose from 47.9 metric tons in February to 111.6 metric tons in March, the highest rate in 10 months, and 56% more than last March (2016).
Chinese gold imports (from Hong Kong) stood at barely 500 tons in 2011, but the cumulative gold imports from Hong Kong have risen 10-fold since then, up to 5,036 metric tons through February 2017. Add in the 111.6 tons from March 2017 and the cumulative total is 5,147 tons worth over $200 billion.
However, the Chinese government may have a far more exciting role for gold in mind for the future.
China May Want to Replace the “Global Dollar Standard” With a Golden Yuan
Since 1944, the U.S. Dollar has been King Dollar, the strongest currency in a world full of lesser paper currencies. At Bretton Woods, New Hampshire, in 1944, representatives of the Allied powers met to decide on a way to run global trade after the end of World War II. America was clearly the leading (least-damaged) economy to survive that destructive war, so the dollar was established as the world’s standard.
Gold was fixed at $35 per ounce and currencies were fixed to the dollar until 1971, when President Nixon closed the gold window and set currencies free to “float” against each other in value. Since then, the dollar has risen and fallen in long (usually decade-long) bull and bear markets, but gold has consistently climbed against the dollar and all other currencies, rising about 36-fold (3,500%) to the dollar since 1971.
Chinese leaders have a much-longer time horizon than Western leaders – subject to the nuisance of regular elections! China seems to be undergoing a long-term conversion to gold by replacing its yuan with dollars – as rapidly as possible – or trading their dollars for gold. China has a new facility that is above to convert paper yuan into physical gold via the Shanghai Futures Exchange. At the same time, the Chinese central bank in Beijing is increasing its gold reserves – which have doubled since 2012.
On the national level, China has been selling off its world’s-largest foreign exchange in the last two years, in an attempt to stem stock market losses and an economic slowdown, but China has not sold its gold. At one point, China’s foreign exchange reserves topped $4 trillion, a result of their success as the world’s greatest exporter, but China’s foreign reserves are now reduced to under $3 trillion. The key, however, is that their gold is in “strong hands” now. As in Russia, gold in China is considered far more valuable than any paper currency, so gold would likely be the last central bank asset that China or Russia would sell.
Meanwhile, among ordinary Chinese, gold is a popular form of savings, since gold is performing better (and is more stable) than the Chinese stock market, real estate market or other investments available there.
According to the latest annual production data (for 2016), China has also been the #1 gold producer in the world for 10 straight years – and the gap is widening, with Russian mining almost twice as much gold as any other nation. China has also been the #1 consumer of gold in the last four consecutive years.
Historically, South Africa was the leading gold producer (it is now #7), followed by North America, but the three leading nations are now China, Australia and Russia, followed by the U.S. and Canada.
The Chinese yuan is clearly not qualified to become a global reserve currency – yet – but the long-term accumulation of central bank gold could eventually result in a gold-backed yuan at a much higher than the current rate. That outcome is years away, but it may the ultimate goal behind Beijing’s gold-buying spree.
While investors concentrate on what the Fed says about interest rates, they should be paying attention to what the central banks of the world are DOING, not saying. The central banks of the West are holding on to their huge gold positions while Russia and China are rapidly adding gold to their core holdings. They are catching up to the West in gold holdings, perhaps planning a new form of gold standard in future decades, creating a world in which most major central banks will rely on gold more than paper money.