Central Banks Turn to Gold as Losses Mount
The comments below are an edited and abridged synopsis of an article by Daniel Lacalle
The world’s central bank gold purchases have reached a level not seen since 1967. They bought 673 tonnes in one month, and in the third quarter, the figure reached 400 tonnes. This is interesting because, since 2020, central banks had been net sellers of gold. Why are central banks globally adding gold to their reserves?
Central banks’ largest percentage of reserves are mainly held in US dollars. It would make sense for some central banks, especially the People’s Bank of China, to depend less on the dollar.
China’s $3.1 trillion in foreign exchange reserves were a key source of stability in 2022, but it could be too much if the next ten years bring a wave of money devaluation.
If central banks start issuing digital currencies, the level of purchasing power destruction seen in the past fifty years will be minimal compared with what could occur with unbridled central bank control. In such an environment, gold’s status as a reserve of value would be unequalled.
Lacalle discusses the losses suffered by central banks (many face losses of more than $1 trillion as bonds morph into liabilities); whether taxpayers will be liable for those losses; the wave of monetary destruction resulting from global debt; the overuse of QE; central banks fighting inflation, while their assets continue to depreciate.
The wave of monetary destruction that could result from global debt, enormous losses in central bank assets, and the issuance of digital currencies finds only one true safe haven with centuries of status as a reserve of value: Gold.
Central banks buy gold because a new paradigm in policy will emerge as a result of the disastrous economic and monetary effects of excessive easing, and neither real earnings nor deposit savings benefit from that. When given the choice between sound money and financial repression, governments have forced central banks to choose financial repression.
Central banks buy gold to protect their balance sheets from their own monetary destruction programs; they have no choice but to do so.