The World Gold Council reveals that central banks have never bought so much gold… and soon bitcoins?
400 tons of gold in the third quarter
The last report report from the World Gold Council (WGC) reports global demand for gold up 28% over last year.
The central banks alone bought 400 tons of gold, or about twenty cubic meters worth 20 billion dollars.
Reuters reports that “Central banks have bought 673 tonnes of gold since the start of the year, a figure we haven’t seen since 1967”. Among the big buyers are the central banks of Turkey, Uzbekistan, Qatar and India.
What for… ?
The governor of the Dutch central bank gave an initial response this week. Klaas Knot said that his gold reserves ensure the solvency of the DNB (Dutch central bank):
This interview followed a letter from the Governor to Sigrid Kaag, Dutch Finance Minister, on September 9.
The letter was titled: “The DNB foresees a deterioration of its finances”…
This deterioration is due to the fact that the ECB is raising its rates. This results in a fall in the value of old debt securities (with very low interest rates). However, the central banks of the euro zone have bought around 42% of all public debt via the famous “Quantitative Easing”.
This problem is therefore not isolated to the DNB. The value of the US bond market having shrunk by 23% this year, the FED is currently reducing its balance sheet by making losses.
Hence the idea of Klaas Knot to reassess the value of the stock of gold held by the DNB. Indeed, much of the gold obtained by European countries was accumulated in the wake of the Bretton Woods agreements, at 35 dollars an ounce, against 1600 dollars today.
Thus, while we thought the “barbaric relic” dead and buried, here it is which will be used to balance the accounts of the central banks.
All that said, a central bank can operate very well with deficit accounts.
Gold instead of the dollar?
According to the WGC, purchases of gold bars and coins (individuals) have increased threefold in Turkey. They reached 47 tons during the quarter. The Turks are buying gold to protect themselves against inflation, which has reached 83%.
It is interesting to note that Turkey suffers from so much inflation even though the central bank’s key rate was 25% in 2019, 20% in 2021 and still 10% today.
The Turkish case shows that it is not enough to raise interest rates to make inflation disappear. This is what Christine Lagarde thinks when she declared “that a recession will not be enough to control inflation”…
Inflation is also a matter of balancing the trade balance. Unfortunately for Ankara, its own is chronically in deficit. This mechanically results in a fall in the lira exchange rate, in turn causing an increase in the cost of imports.
Only the United States can afford to import more than it exports. This privilege is linked to the fact that the dollar is the international reserve currency. Since oil is sold exclusively in dollars, all central banks accumulate them, which artificially supports the greenback on the foreign exchange market.
That said, isn’t central banks’ sudden appetite for gold the result of a growing distrust of the dollar?
This is suggested by the record drop in the volume of foreign exchange reserves in 2022. Reserves are assets that central banks hold in foreign currencies. Bloomberg reports that they are down $1 trillion. Some think we have reached the peak:
Right: Evolution of these foreign exchange reserves since Q1 2021
Source : MFI
These reserves (dollars, yen, euros, yuans, Swiss francs, etc.) fell from 11,946 billion dollars at the beginning of 2021, to 11,174 billion in June 2022. Dollar reserves alone fell from 7,070 billion to 6,652 billion.
Incidentally, these reserves are not held in the form of banknotes. They are placed in the debt of the countries concerned. The current dynamic therefore suggests that the debts of the G7 nations (United States, United Kingdom, Germany, France, Japan, Italy, Canada) are finding it increasingly difficult to find takers.
Why ?
There are several reasons why foreign exchange reserves may have peaked.
- Foreign exchange interventions
Some countries like Japan or the Czech Republic have recently sold dollars and euros to buy yen and crowns in order to stabilize exchange rates.
- Geopolitical tensions
The most indebted countries (USA, EU) went to war with a country to which they owe a lot of money: Russia.
Washington and Brussels hastened to “freeze” 300 billion dollars and 300 billion euros that the Russian central bank had placed in their debt.
It should also be noted that China holds around 970 billion in American debt and that the rag is burning between the Middle Empire and Uncle Sam…
- The fall in the value of debt securities
As we said above, old debt securities lose value due to rising rates. The value of the debts of the other G7 countries has collapsed due to the depreciation of their currencies against the dollar. The euro, for example, is down 20%. And since the world total of reserves is measured in dollars, it has logically fallen.
But in the end, it’s probably the growing disinterest in the dollar that makes gold shine. The two countries which openly defy the hegemony of the dollar, the Sino-Russian tango, have accumulated without counting since the war in Iraq.
Moreover, Beijing has been offering to pay for its oil in gold for several years now. This information is crucial when we know that Saudi Arabia is very close to joining the BRICS, as well as the Shanghai Cooperation Organization…
In short, it’s a safe bet that the trade balances will once again settle in gold if international tensions worsen.
We bet that bitcoin, which has the advantage of traveling for free, unlike gold, will quickly come out on top.
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