Gold Bugs Rejoice – Central Banks Think You’re On
To Something
by John Stepek, Editor of Money Week
Central banks have got the economy and markets covered.
They know what they’re doing. Their theories are backed
up by decades of academic research and expert advice.
Queen Elizabeth inspecting gold bars in Bank of
England. Source: Money Week
Expert advice, as we all know, is completely apolitical,
changes rarely, and never, ever does a complete U-turn, like – I don’t know –
telling us all to start eating butter after years of telling us not to, or
something crazy like that.
So why worry? I mean, what kind of deluded neurotic
doom-monger would keep hanging onto gold (as insurance, of all things!) in
their portfolio with people of this calibre in charge?
Well, I hate to break this to you, but…
Guess who’s buying lots of gold?
Central banks are piling into gold. They have been ever
since the financial crisis blew up in 2008.
In fact, says a new report from the OMFIF (Official
Monetary and Financial Institutions Forum) research group, central banks have
been buying gold at a rate of 350 tonnes a year for the last eight years.
That takes us back to the sorts of levels we saw in the pre-1970 era.
OMFIF has looked at central bank behaviour and gold
buying going back over more than a century (back to 1871, in fact). It’s
broken it down into seven “ages of gold’. There’s some interesting stuff in
there, but I’ll only go back as far as post-World War II this morning, as
that’s the most relevant to today’s topic.
So the fourth age of gold – 1945 to 1973 – covers the
Bretton Woods era, during which gold reserves were rising, notes David Marsh
of OMFIF, “with European countries and Japan amassing sizeable new post-war
holdings as central banks exchanged surplus dollars for gold from the US
Treasury”.
Indeed, between 1950 and 1965, central banks and
treasuries bought up more than 7,000 tonnes of gold.
But this all came to a screeching halt in 1971 when US
President Richard Nixon severed the dollar’s link to gold. Gold was no longer
backing the world’s reserve currency. Instead, it was backed by the faith in
the US government – “fiat” money.
“The fifth age” (from 1973 to 1998) wasn’t what you’d
call a smooth transition. The 1970s were stagflationary, replete with energy
shocks, and marked by geopolitical conflict and domestic political tumult
across developed nations.
But things started to settle down in the 1980s and gold
lost its lustre, helped by US Federal Reserve boss Paul Volcker’s
determination to crush inflation and make the dollar worth holding.
Peak paper – gold in the gutter
We then come to what OMFIF calls the “sales” period – the
sixth age of gold. From 1998 to 2008, “central banks, particularly in
developed countries including the UK, the Netherlands and Switzerland, were
unloading bullion holdings.”
I’d argue that this period – the launch and early years
of the euro experiment – was the “peak” fiat currency moment. That was also
when chancellor Gordon Brown sold off a big chunk of the Bank of England’s
gold at its lowest price for 20-odd years. Gold’s lowest point corresponded
to paper’s peak.
The two phenomena were related, of course. The gold was
sold to buy euros. And it was all purely political – the gold wasn’t sold in
order to get a good price, and the euros were bought to prop up the new
currency in its early days.
It’s also notable – I think – that European countries who
didn’t join the euro were prominent among those selling their gold to prop up
the single currency. It’s almost as though they were paying a loyalty penalty
for their lack of commitment to le grand projet.
Trouble is, since then, the era of purely credit-backed
currency has been found wanting. That great big blow-up in 2008, itself a
direct result of efforts to reflate markets following the dotcom crash,
unsurprisingly rattled faith in the global monetary system.
Not least, it seems, among central banks themselves.
Since 2008, they’ve added more than 2,800 tonnes to reserves – nearly 10% of
the global total. China and Russia are the main buyers, but developed world
central banks have been adding too, or at least keeping reserves static.
This is the longest period of sustained purchases since
that 1950 to 1965 era mentioned earlier. As Marsh puts it, “this has restored
the yellow metal as a central element of money management after four decades
of attempted demonetisation”.
Not unlike the Bank of England’s decision to whack most
of its pension fund money into index-linked gilts, it shows a remarkable lack
of faith in its own ability to run the economy successfully.
And I’m not surprised. It’s hard to see a route out of
today’s debt burdens. But I suspect that it will involve some major shift in
the monetary regime. I’m talking along the lines of a wholesale shift that
will in the future be labelled as an “era”, in the same way as we label the
Bretton Woods era now.
What will it look like? I don’t know. An intense
suspicion of cash and an increasing reliance on digital currency seems likely
to be part of it, judging by the mood music.
But whatever happens, regime change is a chaotic period
during which few things can be relied upon.
So having a bit of gold in your portfolio – just
like our central bankers – seems like a sensible precaution.
John Stepek, is the editor of the best
selling financial publication in the UK, MoneyWeek
Gold Prices (LBMA AM)
20 Sep: USD 1,315.40, GBP 1,011.02 & EUR 1,175.84 per
ounce
19 Sep: USD 1,315.05, GBP 1,007.99 & EUR 1,177.36 per ounce
16 Sep: USD 1,314.25, GBP 999.56 & EUR 1,170.08 per ounce
15 Sep: USD 1,320.10, GBP 998.26 & EUR 1,174.23 per ounce
14 Sep: USD 1,323.20, GBP 1,001.40 & EUR 1,177.91 per ounce
13 Sep: USD 1,328.50, GBP 1,000.36 & EUR 1,183.69 per ounce
12 Sep: USD 1,327.50, GBP 1,000.80 & EUR 1,182.54 per ounce
09 Sep: USD 1,335.65, GBP 1,004.68 & EUR 1,184.86 per ounce
Silver Prices (LBMA)
20 Sep: USD 19.17, GBP 14.78 & EUR 17.15 per ounce
19 Sep: USD 19.12, GBP 14.65 & EUR 17.13 per ounce
16 Sep: USD 18.91, GBP 14.36 & EUR 16.85 per ounce
15 Sep: USD 18.96, GBP 14.32 & EUR 16.87 per ounce
14 Sep: USD 19.04, GBP 14.42 & EUR 16.96 per ounce
13 Sep: USD 19.16, GBP 14.44 & EUR 17.06 per ounce
12 Sep: USD 18.72, GBP 14.11 & EUR 16.68 per ounce
09 Sep: USD 19.41, GBP 14.58 & EUR 17.23 per ounce
