Central Banks Like Gold, Despite What They Say

Watch what they do, not what they say. That is wise advise always, but especially when trying to discern what government is up to.

Central banks routinely argue that gold is a “barbarous relic,” the term Keynes used to describe it. He knew, as do Central Banks, that a true gold standard would make all this deficit spending impossible. Government and banks would have to live within their means because international gold flows would dictate not the Ben Bernankes of the world. Central banks continue their song about gold being obsolete and of no use in a modern monetary system. Yet their actions are entirely different. Julian Phillips reports:

In the last fortnight we heard that central banks continue quietly to buy gold according to the I.M.F.

  • Russia bought 16.55 tonnes in March.
  • Mexico bought 16.81 tonnes in March.
  • Turkey bought 11.48 tonnes in March.
  • Argentina bought 7 tonnes in March.
  • Kazakhstan bought 4.3 tonnes in March.

Other central banks bought smaller amounts. A total of 12 central banks were buyers. We have no reason to believe that this well-established trend will change. Inscrutable China does not report its purchases because it uses a separate Chinese agency to do so, which last handed over 600 tonnes in 2009.

If gold is “useless,” why do Central Banks behave otherwise? Why are they not dumping gold instead of acquiring it?

It is not as if gold is suddenly being acquired. Mr. Phillips shows the gold holdings in tons of 100 nations and the percentage it represents of their total reserves. Portugal holds over 90% of its reserves in gold. The US, France, Germany and Italy hold over 70% gold as reserves.

Mr. Phillips provides his view as to why this is:

This shows that these central banks see gold as a very important reserves asset. This means that when a nation is facing extreme situations, the one asset that they can use as acceptable international money is gold.

As you can see from the table above, gold in national reserves serves much the same function as a nation’s army does –while it may not be used, it deters enemies and rebellions internally. Likewise where a central bank holds sufficient ounces of gold, their ability to weather financial storms, which are currently growing in number, grows. The presence of gold in a nation’s reserves inspires confidence and deters the storm and gives lenders far greater leeway to give more credit.

Central Banks behave quite differently than they talk. But so do most government agencies. More importantly, why do they think gold is important for them and not for you? What do they know that we don’t?

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4 Comments

  1. I have posted this warning here before, and I will do it again. DO NOT BUY GOLD ETF’S !! For every ounce of gold mined from the earth, there are a hundred people who have a piece of paper claiming ownership. If you don’t have the physical gold in hand, you don’t have gold.

    1. Concur. While a financial advisor, I did help my clients make money on gld and slv etf’s, but got out as soon as I realized the paper claims vastly exceeded the known physical quantities. The etfs are a massive accident waiting to happen.

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