The heavy purchases of gold by the world’s central banks – except the Bank of Mexico (Banxico) – are no longer new news, but it is that this race resembles the one that occurred at the end of the sixties.
The magazine agrees with this opinion. The Economistwhich sees a resemblance to what happened in 1968, when the London Bullion Market (the largest precious metals market in the world, the one in London) closed for two weeks because it had run out of gold.
This was due to a five-month run of gold metal outflows from the United States by European central banks, a crisis that marked the beginning of the end of the Bretton Woods agreementwhich since 1944 had kept the dollar pegged to gold at a fixed rate of $35 an ounce.
With the closure of this cycle, a de facto inflationary “dollar standard” was given, which condemns all currencies to have reserves in dollars and the devaluation of fiat money against real money: gold. Not for nothing, 50 years later, an ounce of gold is worth almost $2,000..
Well, history repeats itself. Now the central banks are again buying gold massively. In the third quarter of 2022 alone, they purchased an additional 400 tons for their official reserves, bringing the total from January to September to 670 tons, a pace not seen since that London Bullion Market debacle.
In this graph courtesy of The Economist hoarding of gold purchases is observed. The most important monetary authorities on the planet are preparing for something big, and they should all be doing the same.
Gold is regaining its luster and appeal – even among those who typically disdain it – due to volatility and high inflation. The king of metals is a store of value and safe haven asset, and by not being tied to any individual economy, it offers protection against political and financial turmoil and inflation.
Hence, central bankers are buying gold hand over fist at what they (correctly) consider to be bargain prices.
As in the past, he also thinks The Economistbuying gold is also a way for emerging markets to get rid of some dollar assets.
They need green bills to pay their imports and external debts, but their reserves are mainly made up of US Treasury bonds, which are seeing their values plummet on the secondary market due to the rise in interest rates. To compensate for these losses, central bankers look for liquid dollars in cash and gold. And they do well.
It should not be forgotten that, in order to control inflation, the US Federal Reserve (Fed) has raised interest rates and started withdrawing liquidity from circulation, which exacerbates the shortage of dollars and creates liquidity problems.
Of course, there are also other, less conventional reasons why “non-aligned” central banks hoard a lot of gold, as it provides a way around Western sanctions, such as those being applied to Russia, whose reserves have been frozen since March and most of its banks have been disconnected from the dollar-based international payments system.
For the countries that do most business with Russia, from Turkey to Turkmenistan, gold offers an alternative medium of exchange, and this group of emerging markets has been among the biggest buyers of the precious metal.
Russia’s central bank no longer reports how much gold it holds in its coffers, making the exchanges untraceable. And while moving physical metal involves difficult logistics, it keeps transactions under the Western radar, which is useful for allies like Qatar or Turkey.
A consolation for the dollar, according to The Economistis that no other currency is gaining ground and that central banks may be in a gold rush, but no regime change is on the horizon.
In the case of Mexico, unfortunately, Banxico’s gold reserves have stagnated for the last 10 yearssince since 2012 it only has 3.86 million troy ounces of fine gold (about 120 tons), which are not even found in national territory, but in London, England, as we reported exclusively in this space at the time.
It seems that someone is very comfortable and confident with the inflated “super weight” in Banxico and in the National Palace, but in a few years they will be crying over their lack of foresight by not buying cheap gold when they could.
Editor’s Note: This text belongs to our Opinion section and reflects only the author’s vision, not necessarily the High Level point of view.
MORE NEWS:
William Beard Master in Economics from the Austrian School; liberal, gold market specialist and editor of investment newsletter Top Money Report