There are three seldom-reported gold trends and they all have to do with central banks: their demand is up, the frequency of audits has increased and more are repatriating their gold.
Central bank demand for gold worldwide is up. For the last three years, the amount of gold bought by central banks has exceeded the amount of gold sold by central banks. Their net increases were 544 metric tons in 2012 and 409 metric tons in 2013. Their net increase was 122 metric tons in the first quarter of 2014.
The two main factors causing this trend are less selling from European central banks and more purchases from central banks in the emerging markets of Asia, Latin America, and the Middle East. And in the last three months, European Central Banks has added 7.7 metric tons to their reserves to become a net purchaser instead of a net seller of gold.
The nations that have added the most to their reserves are also interesting. Russia went from 450 metric tons in 2008 to 1,040 metric tons in 2013. Though the numbers from China are a bit sketchy, it appears that their gold reserves went from 600 metric tons in 2009 to 1,050 metric tons in 2013.
The specific reasons why central banks have increased their gold reserves are many and complex, but their general goal is to strengthen their currencies. This is usually done by diversifying their holdings from being too heavily weighted toward one currency like the U.S. dollar and to hedge against inflation. Gold traditionally has a negative correlation with the U.S. dollar: a higher dollar equals a lower gold price and vice versa.
The frequency of audits of countries’ gold reserves has increased. Of course, in the United States, former Rep. Ron Paul, R-Texas, has been the standard bearer for wanting the first full audit of the U.S. gold reserves at Fort Knox since 1953.
Most of the requests have come from countries that have a considerable portion of their gold reserves in the vaults of other central banks. This usually happens when a country does not have its own or has limited deep storage facilities. They also want some gold stored in a financial capitol like New York or London, where liquidity would be easy. For example, Austria has 80 percent of their 280 metric tons of gold in the custody of the Bank of England. The Netherlands and Switzerland also want audits of their gold reserves.
The most common reason given is confirming that the gold is still there. It is still a valuable asset of a nation and should be accounted for on a regular basis. True enough, but full audits have been few and far between until recently.
Finally, more countries are repatriating their gold. For them, an audit is not enough. They would like their gold back. Azerbaijan, Ecuador, Iran, Libya, Mexico, Romania and Venezuela is a short list of countries that have requests into their custodians to transfer some or all their gold back to their countries.
The largest repatriation request has come from the owner of the second-largest gold reserves (3,387 metric tons) in the world, namely Germany. When all is done, custodial positions at the New York Federal Reserve will be reduced, there will be no German gold stored in the Banque de France and gold stored at the Bank of England will remain the same. A total of 674 metric tons in seven years will be eventually repatriated to Frankfurt.
Why is all this activity with gold taking place among central banks? If the global economy is healing, albeit in fits and spurts and slowly, then why are countries interested in increasing their gold positions, making sure their gold is there and even making the effort to bring that gold home?
One explanation is that countries are gearing up for a currency war. Given the alternative of austerity, most countries have pursued aggressive stimulus plans (e.g., flood the market with huge amounts of newly printed money) to shock their economies into growth. The result has been incremental and fragile growth in the United States, the threat of deflation and uneven growth in the European Union and slowing growth in China. The European Union and China are doubling down and increasing their stimulus. There is a real risk of inflation, and that comes with a real risk of a currency war. Having gold reserves you can depend on might be the difference between a winner and a loser.
I also find it interesting that China and Russia have really bulked up their gold reserves as of late. They have been vocal about de-Americanizing the world, starting with questioning the role of the U.S. dollar as the world’s reserve currency. It does not take much imagination to conclude that they are taking steps to strengthen their currencies to prepare for the day that the U.S. dollar is no longer king.
But central banks are secretive and it is hard to know what they are thinking. These are only a few pieces of the puzzle, but the picture they form so far is not a pretty one.
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