SEMI-MONTHLY FISCAL/MONETARY UPDATE
ASK ANY CENTRAL BANKER WHAT THEY THINK OF GOLD, AND THEY WILL DISMISS IT AS A “STORE OF VALUE” OR VALID “CURRENCY” – however……………….WATCH WHAT THEY DO, NOT WHAT THEY SAY !!!
We have discussed many times how increasing deficits and monetary stimulus will also inflate the value of gold relative to other currencies which are more easily diluted by politicians eager to please constituents. The following two charts show clearly how the major Central Banks, the US Fed, ECB, PBOC, BOJ, and SNB have built their balance sheets by printing money and purchasing securities of all types. This process has kept interest rates artificially low and inflated the price of stocks, bonds and most asset classes, with gold participating the least (so far). The bankers are well aware that they are diluting their respective currencies as they try to encourage inflation, which is of course directly opposite from their originally stated mission to control inflation. However, Central Banks are smart enough to know that the clearly demonstrated antidote to paper currency “debasement” is ownership of the currency that has protected purchasing power over the very long term, namely gold.
The chart below, on the left shows how balance sheets of the five major Central Banks have grown since 2009, in the aftermath of the Great Recession. The acceleration of money creation was first justified as a method to avoid a worldwide deflationary collapse, but, though theoretically independent of political influence, the bankers to this day have not had the political will to pull back the stimulus and shrink their respective balance sheets. Note from the chart below that the U.S.Fed stopped printing money a couple of years ago, but the other Central Banks took up the slack. We all know that the US Fed has announced their intention to shrink their balance sheet at a very modest pace, starting in the current quarter. However far that process goes in the U.S., and even if the ECB follows suit within the next six to nine months, we have no doubt that China and Japan will more than take up the slack.
The chart below, on the right, shows how the Central Banks, at precisely the same time that they are diluting their currencies with the newly created money which has been used to purchase stocks and bonds, have been relentlessly accumulating gold bullion. As a percentage of foreign exchange reserves, gold still represents only about 9.5% of their total, up from a low of about 8.5%, down from a high since 2000 of about 12.5%. By no means, therefore, are the Central Banks over weighted with gold bullion. It is worth noting that one of the most aggressive purchasers, relative to the size of their economy, has been Russia, whose holdings have quadrupled in the last ten years to 1,556 tons at the end of June. Also interesting is that China, the largest producer of gold in the world, mining 400 tons out of about 3,000 worldwide tons, purchases all their domestically mined gold within undisclosed governmental agencies. They announced in 2015, for the first time in about six years, that their ownership over those six years had increased about 60% to 1,658 tons. Only modest additional purchases have been announced since then, and many observers believe that there are 5,000 tons or more within various Chinese agencies, far more than officially disclosed.
It is crystal clear that Central Bankers, though unwilling to acknowledge gold as a “currency”, allocate assets in a far different manner.