The latest IMF statistics report that the Canadian government has sold almost half of its gold reserves compared to what was reported in late 2015.
To put this in context, half of virtually nothing is virtually nothing. The Canadian gold reserves dropped from 3 tonnes down to 1.7 tonnes. For you or me, or any individual, this would still be a lot of gold. But for an entire country, it is almost nothing.
The Canadian gold reserves now make up just 0.1% of Canada’s total reserves. Apparently Canadian officials would rather hold the debt of foreign governments over the precious metal.
The U.S. central bank is reported to hold 8,133 tonnes of gold. We don’t know if all of that reported gold is actually stored in the vaults because there hasn’t been an audit of it in a long time.
Still, when you compare the U.S. gold reserves to Canada, the Canadian reserves are basically nothing. The population may only be around 35 million people, but it is hard to believe that a relatively rich country compared to the rest of the world could have so little. It is also hard to believe that Canada once held over 1,000 tonnes if you go back about 50 years.
Many small third-world countries own more gold than the Canadian government does now. It is not clear why Canadian officials have drained the reserves.
The Canadian dollar was a highly respected currency just a few years ago when it reached par with the U.S. dollar. But over the last couple of years, the Canadian dollar has fallen quite a bit. One Canadian dollar will now get you about 73 cents in U.S. currency.
The U.S. dollar has certainly been strong all over, but Canada and the U.S. are typically tightly linked. Then again, the Chinese and Japanese central banks own over a trillion dollars of U.S. government debt. That is one big and obvious difference.
The fall in commodities, particularly in oil, probably has not helped the situation in Canada. It has become less attractive in terms of investment when compared to the U.S., which can send the Canadian currency down.
Fiat Currency and Gold
Several years ago, then Congressman Ron Paul asked then Fed Chair Ben Bernanke why the Fed holds gold if he doesn’t consider it to be a form of money. Bernanke’s answer was that it is “tradition”. In a sense this is true, but it goes far beyond this and beyond where someone like Bernanke would want to admit.
Every major currency in the world is a fiat currency. It is coins and paper created by central banks. In our modern world, most of it is in the form of digits actually. For the coins that do circulate, they are typically cheap metals and the value of the coins do not reflect the metal content.
The U.S. gave up the last of its gold backing in 1971 when Nixon cut off the last link. Before that time, foreign governments could redeem gold for their U.S. dollars. Since the Fed was creating money out of thin air and France was collecting on some of this gold, it could not be sustained.
By the year 2000, even the Swiss had given up their last links to a gold-backed currency. Now it is just a system of trusting central banks with a government-granted monopoly on the power to issue money.
Even though there is no official gold backing for any currencies, we have to wonder the psychology of holding gold reserves. After all, if gold reserves really don’t serve a purpose in backing the currencies, why don’t all central banks just sell all of their gold?
In a sense, I think it is something of a backup plan. If a central bank gets carried away in inflating its currency, then at least having gold reserves might be enough to help put some trust back into the currency, especially in a desperate situation.
The U.S. government runs annual deficits that are greater than the total value of the reported gold reserves. Still, it is something that is there if needed. The comparatively large economy is obviously the major factor that attracts foreign investment.
In addition, even though the Fed had an extremely loose monetary policy from 2008 to 2014, the Fed has kept the monetary base stable for well over a year now while the other central banks continue to inflate like crazy. This helps keep the U.S. dollar strong.
There are so many factors that come into play, it is difficult to judge how much, if any, gold reserves come into play in determining the strength of a currency. Obviously Canadian officials think there is basically no role for gold.
For right now, Canadian officials are probably right for the most part. Still, if the currency there gets into any trouble, the lack of any backing, even if unofficial, may exacerbate the problem. A currency with a little bit of gold behind it may be better off than a currency with virtually no gold behind it.
Ultimately, the marketplace should determine the form of money that is used in society. Then it really would make sense for all government/ central bank gold to be sold off. But as long as we have fiat currencies under the control of government, then perhaps a little bit of gold provides a little extra trust in times of turmoil.
We will have to wait and see what Canada’s lack of gold does to its currency over the long term, if anything.