Countries Are Beginning to Stockpile Gold
The comments below are an edited and abridged synopsis of an article by Lawrence Thomas
Bank of China increased its gold reserves from 1842.6 tons to 1,852 tons in December 2018. This represents the first major purchase of gold by the bank since 2016. There appears to be a purpose for the renewed interest in gold.
While the Fed has tried to keep the gold price low in an effort to preserve world dominance of the US dollar, other countries have taken advantage by accumulating more precious metal at bargain prices.
China isn’t the only country bullish on gold. For the first time in years, both Poland and Hungary amassed gold in 2018, and other central banks are following suit.
The main reason for gold’s renewed popularity is that many countries want to escape dollar dominance. The more gold countries such as China and Russia hold, the greater the threat to the dollar.
Russia has been adding to its gold reserves since 2005. In the first half of last year, Russia purchased 3.381 million ounces of gold. Turkey added 1.223 million ounces. With global relationships becoming murky, and trade wars a real possibility, many central banks are turning to gold. This is a change from two decades ago, when central banks were selling it.
The Fed has deliberately kept the gold price low. China, Russia and others are taking advantage of this. Global gold purchases in the first quarter of 2018 rose 42% from 2017, an increase of 22%. Other central banks have been amassing gold at a far greater rate than the Fed, leaving it in a precarious position as the dollar faces an increasing threat.
Another area of concern is rising interest rates. Interest hikes have not only increased the value of the dollar, but have also increased the debt value of many emerging markets. This could lead to another monetary crisis in these countries, which will have a harder time repaying their dollar debts, let alone the interest thereon.
Russia and China have been dumping US debts onto the world market instead of buying more US bonds. With the US deficit at an all-time high, it is being deprived of critical income sources. President Trump’s tariff strategy is likely forcing countries to act against the interest of the US. By creating a shortage of dollars, the ripple effect will be global and severe.
A real crisis will occur when the Fed starts printing unlimited fiat dollars to pay off its debts, which will bring about inflation. As China and others buy up gold to devalue the dollar, they know exactly what they are doing.