Earlier on this blog we wrote this article about how Central Banks love gold despite the public perception that they don't like gold and think it is a useless relic in the modern financial world. That article proved conclusively that Central Banks view gold as a very important global reserve asset that is a hedge against loss of confidence in fiat currency. Just in case that article did not convince you, Alan Greenspan leaves no doubt about it in this article he wrote for Foreign Affairs. Below are some quotes from his Foreign Affairs article.
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"If China were to convert a relatively modest part of its $4 trillion foreign exchange reserves into gold, the country’s currency could take on unexpected strength in today’s international financial system. It would be a gamble, of course, for China to use part of its reserves to buy enough gold bullion to displace the United States from its position as the world’s largest holder of monetary gold. (As of spring 2014, U.S. holdings amounted to $328 billion.) But the penalty for being wrong, in terms of lost interest and the cost of storage, would be modest. For the rest of the world, gold prices would certainly rise, but only during the period of accumulation. They would likely fall back once China reached its goal. "
"The broader issue -- a return to the gold standard in any form -- is nowhere on anybody’s horizon. It has few supporters in today’s virtually universal embrace of fiat currencies and floating exchange rates. Yet gold has special properties that no other currency, with the possible exception of silver, can claim. For more than two millennia, gold has had virtually unquestioned acceptance as payment. It has never required the credit guarantee of a third party. No questions are raised when gold or direct claims to gold are offered in payment of an obligation; it was the only form of payment, for example, that exporters to Germany would accept as World War II was drawing to a close. Today, the acceptance of fiat money -- currency not backed by an asset of intrinsic value -- rests on the credit guarantee of sovereign nations endowed with effective taxing power, a guarantee that in crisis conditions has not always matched the universal acceptability of gold."
"If the dollar or any other fiat currency were universally acceptable at all times, central banks would see no need to hold any gold. The fact that they do indicates that such currencies are not a universal substitute. Of the 30 advanced countries that report to the International Monetary Fund, only four hold no gold as part of their reserve balances. Indeed, at market prices, the gold held by the central banks of developed economies was worth $762 billion as of December 31, 2013, comprising 10.3 percent of their overall reserve balances. (The IMF held an additional $117 billion.) If, in the words of the British economist John Maynard Keynes, gold were a “barbarous relic,” central banks around the world would not have so much of an asset whose rate of return, including storage costs, is negative."
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My added comment: Just to make sure you caught what Greenspan said, here it is again.
"If the dollar or any other fiat currency were universally acceptable at all times, central banks would see no need to hold any gold. The fact that they do indicates that such currencies are not a universal substitute."
"If, in the words of the British economist John Maynard Keynes, gold were a “barbarous relic,” central banks around the world would not have so much of an asset whose rate of return, including storage costs, is negative."
This is almost exactly what we said in our earlier article linked above about Central Banks and gold. Those inside the system understand completely that gold is the "collateral of last resort" that trumps everything else in a crisis. While they have no interest in a return to a full gold standard (where currency can be exchanged for actual gold), they hold massive gold reserves and would no doubt use them to back the currency one way or another if it was needed to maintain the financial system. All they have to do is simply revalue the gold much higher to do that. It's been done before.
Right now gold (and many commodities) are in a downtrend. What we have to watch is to see if this means we are heading into a deflation event. If that happens, gold and other hard assets will probably go lower in price. If the deflation becomes too severe, the monetary authorities are likely to respond one way or another to fight that. That is when gold could see a sharp reversal upwards in price. It's all unpredictable, but gold is still a key collateral asset in the system regardless. If you don't believe me, ask Alan Greenspan. That is why we follow it here.
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