Central Banks Still Hoarding Gold
Who's Still Buying Gold?
According to recent IMF data, Kazakhstan, Belarus, and Russia have all been increasing their gold reserves. We already know that China has been increasing its central bank holdings of gold based on its report over the summer, which was the first update in six years.
Meanwhile, Mexico is reportedly cutting its holdings of gold, which isn’t all that much to begin with.
The U.S. is still the top holder of gold by a long shot. The Fed has gold reserves totaling over 8,000 tons. The next closest is Germany with just over 3,000 tons. This is assuming that the Fed actually has possession of the gold that it claims to have and that it hasn’t been sold or leased out.
Italy and France are third and fourth in gold holdings and China now comes in fifth with its recent updates. Rounding out the top ten are Russia, Switzerland, Japan, the Netherlands, and India.
If these counts are accurate, then the U.S. and Western Europe still control the majority of gold in the world that is held as reserves by central banks.
But with the recent IMF reports, there is a clear trend of gold flowing out of the west and into the east.
While we certainly think of the big players in Russia and China, it is hard to believe that Kazakhstan has about 210 tons of gold in reserve. This is a sizeable amount for a relatively small country that is far from being thought of as an economic powerhouse. Kazakhstan does have a lot of land though, with a lot of oil and other natural resources.
In the cases of China and Russia, it makes sense that they would be increasing gold reserves. In fact, it is almost hard to believe that it took them so long to start accumulating significant amounts.
In the case of Russia, it is no surprise that they seek gold and other reserves in a move away from the U.S. dollar. The U.S. government basically forced their hand by imposing sanctions. As tensions increase between the two governments, Russia is not going to be a sitting duck with a bunch of U.S. dollars.
In the case of the Chinese, increasing gold reserves is just a matter of diversification. China’s gold reserves still make up less than 2 percent of its total foreign reserves. Most of its holdings are in government debt in dollars and euros. Why wouldn’t China increase its gold holdings?
Not Ideal, But Better
While I believe gold plays an important role in our financial world, especially with its history in serving as money, I don’t necessarily advocate that central banks buy gold.
In a true free market, central banks wouldn’t be holding vast reserves in foreign currencies, gold, or anything else. Actually, in a true free market, central banks wouldn’t exist and the marketplace would determine the money to be used.
But given the world that we live in, and given that central banks hold reserves, it is far smarter of them to hold gold than a bunch of government debt denominated in fiat currencies that are almost continually debased.
It is crazy to think that the Chinese central bank still holds something in the neighborhood of $1.2 trillion in U.S. Treasuries. The same can be said about Japan.
The Chinese central planners are mercantilists who believe they need to prop up their export sector at the expense of their currency and the general population. They buy up U.S. Treasuries (and debt in other currencies) in order to hold down the value of their currency. It is a subsidy to the Chinese export sector, at least in the short term.
Meanwhile, this serves as a subsidy to American consumers who can buy cheaper products from overseas. This is done at the expense of Chinese consumers, who have to pay more for goods and services.
The one thing the Chinese are getting at least a little bit right is their accumulation of gold. While it is still a small fraction of their total reserves, at least the trend is encouraging. In a communist country, even if by name only, where the central planners seek to manipulate and control every aspect of the economy, the buying of gold is a bright spot.
Again, this isn’t to endorse central banks buying gold, but just to say that it is much better than buying the debt of foreign governments at extremely low interest rates.
Despite the many problems in the Chinese economy, we should expect that the central bank there will continue to increase gold reserves. We should also expect that the U.S. central bank will continue to not accumulate gold at this point.
It would also be expected that India would continue to accumulate more gold, although the government there is doing its best to prevent private citizens from importing more gold into the country.
Gold is flowing from west to east in the world, both in terms of central bank holdings and private holdings. I expect this trend to continue.
Luckily, you don’t have to depend on the Fed to hold gold for you. You can be your own central bank and hold gold. It isn’t going to lose its shine any time soon.
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