Central banks are repatriating gold: hard times ahead?

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In this era where everything is digital, fast, smart, it sounds really strange that gold, a static piece of metal, still covers a major monetary role.

Gold is one of the oldest form of money and through history it became a store of value all over the world. Anywhere you go, gold is recognized as a precious metal and people assign a significant value to it.

Today gold is no longer the main mean of settlement used for trade and for international transactions. 
When we think about money we don’t naturally think at gold, it is more likely that currencies like dollars, euros or yuans come to our mind.

Well, gold is still an extremely valuable resource and given the latest facts it seems that it is coming back to play an important role in the definition of the world monetary system.

Central Banks and Gold

Gold continues to remain an integral part of central banks reserves along with other currencies.
While until 2010 central banks used to be net sellers of gold, recent developments show that the trend has inverted and now we see central banks from all over the world increasing the amount of their reserves made by gold.

As you can see from the chart below, the amount of central banks gold reserves have substantially increased.

Source: World Gold Council

You may notice that the global gold-buying from central banks coincides perfectly with the rise of unconventional monetary policies implemented after the financial crisis.

Those policies were basically a monetary expansion whose success still has to be confirmed. It appears that banks are hedging against their own policies.

Over the past few years, more and more countries have decided to use gold as reserve asset. What is more interesting to this increase in gold reserve, is that along with gold purchasing, the repatriation of gold is becoming more and more popular.

Countries have accumulated gold or asked for a backing from the BoE or the FED. Right now not only many countries are building up their gold reserves, they are also getting gold in its physical form away from foreign central banks or the LBMA.

Countries like Poland, Austria, Germany, Netherlands, Hungary have undertaken repatriation programs while China and Russia account for most of the purchase activity on markets.

Why is this happening?

The Role of Gold

The increase of gold reserves following expansive monetary policies could be the easy explanation. While this might be one part of the story, I think that the real reasons must be found by taking into account the value of gold against fiat currencies.

“Money Is Gold… And Nothing Else”

J.P. Morgan

Although we are no longer used to settle transactions with gold, gold still remains one of the safest assets in the world. Its value is recognized worldwide and it is an asset that comes with no counterparty risk.

Every other asset require the performance of a counterpart to hold its value. Take stock for example, they need a productive company with a sound business, bonds have to be repaid, even land can’t be kept without paying taxes. Precious metals are investments that you can hold outright that have no risk against it, you just have to store them safely and they keep their value over time.

From an historical perspective, the possession and increase of precious metals reserves of a given nation have always been decisive in international trends.
And here lies one of the main (good) reasons for holding precious metals:

In the twentieth century we had four monetary systems!

From the international gold standard to the floating exchange rates period during the two World Wars. Then came the Bretton Wood System that “suddenly” ended in 1971 to leave space to our present system, entirely based on fiat currencies (that is: backed by nothing) and a prominent role of the US dollar in the world economy.

There is no guarantee that this system will last forever, given the duration of the others we are already overdue. This potential development and the role of gold is becoming more and more recognized by central banks and their behaviour is a proof.

Even under normal market conditions, gold is one of the bases of confidence and serves a function of stability in the system. It supports financial stability and strengthens market confidence.

In case of structural changes of the international financial system gold can play a huge role in stabilizing and defending the position of a country.

This is why it is important. Everybody trusted fiat currencies for quite a long time and now central banks are building up their reserves with gold.
I think that it is all about getting ready for some big event in case it happens.

Given our track record when it comes to international monetary systems, the hoarding of gold shouldn’t come as a surprise and it is not unreasonable at all.

Gold is still considered to be one of the world safest assets and world central banks are now proving it to everybody.

This article is for informational purposes only, it should not be considered financial advice.
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