Ronan Manly Asked --- Why Do Central Banks Hold Gold Reserves?

One of the most amusing things about following the topics covered here is when I see articles suggesting that central banks no longer view gold as playing any important role in the global economic/financial system. Of course, it is true that gold no longer plays any role in the monetary system directly as it did for many years. You cannot exchange Federal Reserve notes for actual gold at your local bank these days.


However, anyone who thinks central banks don't view gold as important is simply out of touch with the facts. This new article by Ronan Manly at BullionStar.com lays out those facts pretty clearly. 

He simply asked the central banks around the world who own or hold more than 30,000 tons of gold why they own or hold it and most of them replied. Interestingly, the US did not reply. Below I have excerpted a bit of the concluding summary from the article.

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"In their own words, the reasons central banks hold gold in large quantities are many fold, however there are consistent themes in the central banks’ explanations. Many of the respondents cited gold’s ability to be mobilized in a crisis, that ‘gold holdings can be activated in an emergency’, that gold is an ‘emergency reserve in a crisis’, ‘a contingency against unforeseen events’, a form of ‘insurance’, or as the Bank of England says ‘a war chest’ and the ‘ultimate asset to hold in an emergency’. As such, nearly all central banks referred to gold as a safe haven asset.

Many central banks mentioned gold’s high liquidity, and some referred to the ability to use their gold to raise liquidity in a foreign currency, even for foreign exchange intervention.

Gold’s role as a hedge against inflation was cited in a number of the central bank answers, which explains why central banks look to the gold price as a barometer of inflation expectations.  

Many of the banks also pointed out that because of the unique attributes of physical gold, such as limited supply and mined into existence, gold does not have any counterparty risk or credit risk, and because it is not issued by governments, it has no default risk.

. . . . .

With such widespread support among the world’s central banks for holding physical gold, as a safe haven, as an inflation hedge, and as a form of investment diversification, their enthusiasm for gold in 2018 looks as strong as it has ever been in any decade of the modern era."

Please click here to read the full article on BullionStar.com

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My added comments: Russia and China were not part of this survey, but their actions in recent years of massive gold buying speak louder than words. This recent article details the enormous effort Russia is making to pile up gold reserves (click translate button to get the english version).

So we have the leading world powers (US, EU nations, Russia, China, etc) owning gigantic gold reserves (over 20,000 tons along with the IMF who owns over 2800 tons), but they don't view them as having any importance in the modern financial world? Amusing.

The most often cited reason by central banks for holding gold in this survey was basically "in case of an emergency". So, central banks want to have gold "in case of an emergency", but we often see financial articles suggesting it is silly for individuals to hold any gold for any reason. Amusing.

Largest Holders of Gold @ January 2018:

1- United States - 8133 tons

2- Germany - 3373 tons

3- IMF - 2814 tons (the BIS also owns 103 tons)

4- Italy - 2451 tons

5- France - 2436 tons

6 -China - 1842 tons (and rapidly growing)

7- Russia - 1838 tons (and rapidly growing)

8- Switzerland - 1040 tons

9- Japan 765 tons

10- Netherlands 612 tons

The next 40 countries making up the top 50 gold owners own over 6,800 additional tons of gold combined. Thirty five nations around the world own at least 100 tons of gold. But no one thinks owning gold is of any importance in the modern financial world? Amusing.

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Picture of some Russian gold reserves recently posted on Jim Rickards twitter feed:

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Added news note: Tonight (3-27-18) China says North Korea has agreed to denuclearize. 

http://www.scmp.com/news/china/policies-politics/article/2139207/kim-jong-un-says-he-committed-denuclearisation-during

https://www.cnbc.com/2018/03/27/north-koreas-kim-jong-un-visits-china-according-to-state-media.html

If true, this should remove this situation as something that could destabilize markets. I did mention this news to Jim Rickards and he is hopeful that it is real, but advises to continue to monitor the situation until more evidence surfaces to confirm it.

Oilprice.com -- Will China's New Oil Futures Flop?

With the new Yuan based oil futures contracts set to open trading on Monday March 26th, Irina Slav pens this new article in Oilprice.com asking if one problem related to how these contracts work will cause them to fail. Below are excerpts from her article.

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"This week will see a historic event: on March 26, trading will begin in yuan-denominated crude oil futures contracts on the Shanghai International Energy Exchange. The futures launch is historic because it will be the first time that foreign traders will have access to a Chinese commodity market. It is also historic because the yuan oil futures have been in the making for years, but have been delayed time and again.

. . . . .

China last year became the world’s top oil importer, and this year it will likely keep the crown. The time is as ripe as it will ever be for the launch of the futures, and China is now trying to make sure that volatility will not be excessive. This, however, could compromise the success of the futures.

. . . . . . . .  only time will tell if the bigger goal could be achieved: displacing the dollar as the one and only petrocurrency in the world, part of Beijing’s strategy of advancing the country’s global influence by making the yuan an international currency."

Please click here to read the article to find out the specific problem she mentions

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My added comments: Many people are watching this new futures contract to see what kind of impact it may have on the so called "petro-dollar".  Some think it will be the start of the end of the US dollar as the global reserve currency. Others think this event will have little impact on the US dollar any time soon. Anything that did disrupt the US dollar as global reserve currency would be viewed as significant news here and relevant to potential monetary system change, so we will follow this event over time.

What we do here is follow news and events and report what actually happens which is much more important than what various people predict is going to happen. Readers can then assess how various predictions panned out versus what actually happened.

Added note: Judy Shelton tweets out a link to a Wall Street Journal article on the potential impact of the new petro yuan contracts. A lot of people are following it and there is a wide variety of opinion on the potential impact.

News notes from first day of trading: Reuters runs this article on the first day of trading and Zero Hedge reports that over 23,000 contracts trade in the first hour which they described as "significant demand".  Dr. Stephen Leeb offers his pro China views on the situation in this article.

Atlanta Fed GDP Now Forecast

Many people follow the Atlanta Fed GDP Now forecast because it has tended to be more accurate more often than some other forecasts. But his quarter, they seem lost. Below I have pasted in their forecast model which has plunged from a projected high over 5% to now under 2%.  

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Click here to visit the Atlanta Fed GDP Now Forecast page

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Added note: Jim Rickards posted the track of this decline in this twitter post and also points out that he explained how the over 5% projection was way off base back in February in an appearance on Fox Business News. The discussion of the GDP Now number starts about the 2 minute mark where Rickards explains why the number changes during the quarter. Since we are now pretty close to the end of the quarter, the lower forecast should end up being more accurate.

Robert Pringle - The Capture of Money

Whenever Robert Pringle offers a new article on his blog, I try to feature it here. Mr. Pringle has a long and established career working with central bankers from around the world. 

His decades of experience provide a valuable insight into the world of central banking that we don't see covered that well in mainstream media. Below are the opening paragraphs of his new article, The Capture of Money. In this article, he explains why he thinks "money has become an elite sport".

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"Money is a near-universal social institution. It  evolved to support human cooperation and to control and coordinate the life of humankind. Like other core institutions, such as marriage and language, the forms that money takes may differ widely. The values and norms governing money’s use, and the practices associated with it, also vary widely.

For the individual, money is also a psychological symbol. Money allows each person to enjoy the fruits of others’ work. For many billions of people, obtaining money is the sole purpose of their everyday life.

But there is a difference in how we, as individuals, treat marriage and language, on one hand and money on the other."

Please click here to read the full article by Robert Pringle

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Some info about Robert Pringle:

"After obtaining a Masters degree in economics, sociology and history from King’s College, Cambridge University and post-graduate study at the London School of Economics, Robert joined The Banker, part of the FT group, later being appointed the Editor.

He also served as deputy director of the Committee on Invisible Exports, a body representing a wide range of UK service sectors, which was set up by the Bank of England to study and publicise the contribution made by financial, business, professional and allied services to world trade and the UK economy. He led a study that made the first published estimates of the invisible earnings of UK professions such as law, medicine and accountancy.

From 1979 to 1986  he was the first executive director of the Group of 30, an influential think tank based at the time in the World Trade Centre, New York (it has since moved to Washington, DC). For the G30, Robert co-authored pioneering studies of the foreign exchange and interbank markets, and on IMF borrowing from the private markets, and the emerging profession of official reserve management."

Bloomberg - How China is About to Shake Up the Oil Futures Market

The date for trading oil contracts in yuan is coming up on March 26th. We will keep an eye on this event to see how much impact it has. Bloomberg published this article (excerpt below) that is a pretty good summary of where things stand leading up to the opening of trading. 

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"China, the world’s biggest oil buyer, is opening a domestic market to trade futures contracts. It’s been planning one for years, only to encounter delays. The Shanghai International Energy Exchange, a unit of Shanghai Futures Exchange, will be known by the acronym INE and will allow Chinese buyers to lock in oil prices and pay in local currency. Also, foreign traders will be allowed to invest -- a first for China’s commodities markets -- because the exchange is registered in Shanghai’s free trade zone. There are implications for the U.S. dollar’s well-established role as the global currency of the oil market."

Click here to read the full article on Bloomberg

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My added comments: It appears that China is launching a PR campaign to try and convince the world that it is ready to open up its system so as to promote broader use for their currency. This article in RT is one example of that. 

We will just follow this to see what happens over time and how much impact this has on the US dollar.

Added news note: Xinhua.net runs this article on the launch of the new contract with these concluding comments:

"While foreign investors are allowed in the petro-yuan trade, Gu said there have been relatively few accounts opened by overseas clients, indicating concerns over market liquidity and regulatory uncertainties.

"It would be difficult to challenge the dollar's dominance in oil pricing in the short term," Gu said. "In the long term, however, multi-currency pricing will become a trend in the future."

Jim Rickard Latest on Bitcoin, China and The Fed

Jim Rickards has release a flurry of articles recently on a variety of topics. Below are links to those articles with a selected excerpt from each one. Jim talks about new efforts to regulate Bitcoin, problems he sees coming from China and headed towards the US, and why the Fed wants inflation so badly.

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Big Brother is Coming for Bitcoin

"Many advocates of bitcoin and other cryptocurrencies have a naïve belief that their digital assets are “beyond the reach of governments,” “cannot be traced” and “cannot be frozen or seized.”  They’re beginning to learn otherwise."    full article

SEC Lowers the Boom on Bitcoin

"I’ve warned repeatedly that government regulators would be putting the squeeze on bitcoin and other cryptocurrencies.  Well, the noose just got tighter."   full article

China's Coming Meltdown will Spread to the US

"The coming credit crisis in China is no secret. China has $1 trillion or more in bad debts waiting to explode. These bad debts permeate the economy.

Some are incurred by Chinese provincial authorities trying to get around spending limitations imposed by Beijing. Some are straight commercial loans on bank balance sheets. Some are external dollar-denominated debts owed to foreign creditors. The most dangerous type of debt involves a daisy chain of insolvent corporations buying debt from each other."              full article

The Fed Must Have Inflation - Failure is Not an Option

"The Fed says incessantly that “price stability” is part of their dual mandate and they are committed to maintaining the purchasing power of the dollar. But the Fed has a funny definition of price stability.                 . . . . .

And how you construct the price index matters also. It’s an inexact science, but zero inflation seems like the right target. But the Fed target is 2%, not zero. If that sounds low, it’s not."                                    full article
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Added note: Here another Bitcoin regulation article suggested to me by a reader:

https://wolfstreet.com/2018/03/11/cryptocurrency-manipulators-can-now-go-to-jail-says-us-federal-court/

North Korea News Note

Thursday (March 8) the world got a surprise announcement that North Korea is offering to meet with US President Donald Trump to discuss potential denuclearization by North Korea. Pundits quickly started to debate whether North Korea is serious and whether or not this was a "win" for President Trump. Here, we are more concerned on any impact events related to North Korea may have on global markets and financial stability.

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It is important to continue to monitor this story to see if peace will be achieved and take potential major conflict between the US and North Korea off the table. Obviously, it is too early to tell. Hopefully, this is a legitimate offer by North Korea and can actually ramp down the global tension and lead to a long term resolution of the problem. We will just continue to follow it here.

Alasdair Macleod Offers Comments on Upcoming Petro-Yuan Oil Contcact

This is some news we think is worth follwing since it appears that the so called Petro-Yuan oil contracts are expected to open trading later this month on March 26th. In the 3 minute video below (link to it here) Alasdair Macloead offers some comments on this event. Below the video I will have a few added comments.

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Alasdair Macleod on Upcoming Petro-Yuan Oil Contract

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My added comments: This upcoming event is attracting quite a bit of attention in both mainstream and alternative media sources. There is a wide range of views on the impact of this all the way from almost no impact at all to the beginning of the end of the so called "Petro-Dollar" era. 

In this video Mr. Macleod mentions that President Trump has now announced new tariffs on China and suggests that this may be part of this whole situation. I don't pretend to know what all may be involved with this, but here are a few bullet points we can list that do know to be true whether they tie to this event or not:

- China (and Russia) have been adding to their sovereign gold reserves at a heavy pace over the last several years for some reason and both are continuing to add to gold reserves

at substantial levels

- China and Russia have both stated publicly that they are interested in ways to bypass the US dollar in the future

- Russia is under sanctions from the US and now China is the target of new tariffs that some believe may escalate into a "trade war"

- Venezuela and Iran have recently expressed interest in trying to setup sovereign cryptocurrencies related to oil to perhaps avoid US sanctions

- most everyone agrees that one key to the US dollar assuming the role of global reserve currency is that most global oil trading contracts are priced in US dollars and settled in US dollars creating substantial global demand for US dollars

All of this bears watching closely this year. On top of the potential for conflct to arise over sanctions, tariffs, and currencies, we also still have North Korea lingering in the background. Obviously, there is lot going on between the US, China, Russia, and North Korea.

According to Jim Rickards, President Trump held off on imposing tariffs on China because he wanted them to help the US out in regards to North Korea. Jim says that China did not follow through on promises to do that and so now President Trump sees no reason to hold back on the tariffs he has wanted to impose for a long time and perhaps even label China as a "currency manipulator".  He offers more thoughts on the situation in this recent article.

All of this has the potential to create a lot of turmoil globally this year and certainly could upset world markets. These are the kinds of events we try to monitor here in case something does erupt that would ignite a new global crisis. Anything that disrupts the current monetary system could lead to major changes that we do try to watch for here.

On the one hand, the US economy seems to be pretty stable. The US stock market is near all time highs. Employment reports seem to be pretty good. There is record high business and consumer confidence. However, we still have to keep a careful eye on the events mentioned above along with the impact of further money tightening by the US Fed and other central banks. There are plenty of serious potential problems that could arise pretty quickly despite the relative calm that seems to exist for the time being.

The Case for a Commodity Reserve Currency

Readers here know that we are always on the lookout for ideas on monetary system reform. I have been fortunate to listen in from time to time on some email discussions between economists who discuss various ideas and proposals for reform.

Dr. Leanne Ussher was very kind to forward me this link to a 2009 paper that looks at the idea of a "Commodity Reserve Currency". Below is the abstract that provides a summary of the proposal. Dr. Ussher advises me that she is working on some concepts for a future potential global reserve currency that expand on the main idea presented in this paper. 

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Global Imbalances and the Key Currency Regime: The Case for a Commodity Reserve Currency

Abstract

This paper considers Kaldor's 1964 proposal for a commodity reserve currency (CRC) as a serious alternative to the current system, which has the US dollar as the world reserve currency. It argues that the reserve-currency status of the US dollar helped to create global imbalances and financial fragility pre-empting the current crisis. The primary goal of the CRC was to resolve the 1960 Triffin dilemma, which remains a problem today. Following a brief history of alternative monetary reform proposals, the CRC is outlined. Backed by a basket of 30 or so commodities, the CRC would fix their price index in terms of the international reserve and reduce the disorderly swings in individual commodity prices. Sovereign governments would be free to fix or float their national currencies to the CRC. With growing fears over global warming and national resource security, particularly in the world's poorest countries, the introduction of a CRC could reduce supply constraints, stabilize costs of production, promote global effective demand from the periphery and balance growth between periphery and core countries.

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My added comments: By now readers here should understand that there are a variety of ideas and proposals out there that are seriously discussed by economists as ways to reform the current monetary system. I have attempted to feature a variety of those here so that readers may be aware of them and also explore them further if they wish. I will add this article to the page on this blog where I have listed some of these various ideas and proposals. When Dr. Ussher is able to provide some added information based on her work on this idea, we will feature that in a followup article in the future.

Added note 5-2-2019: This 2014 paper adds some more detailed information on the idea of trying commodities to currencies.

Currency (and Cryptocurrency) Wars for Real?

The term Currency Wars has been used quite a bit in recent years to describe a situation where countries actually try to use devaluation of their own currencies against each other in an effort to stimulate domestic exports. Jim Rickards even wrote a popular book on the subject.

A question we might raise based on what we are seeing in the news lately is if we are seeing new "Currency Wars" alongside "Cryptocurrency Wars" for real? In this case we are not just talking about countries trying to gain a trade advantages, we are talking about about actual economic attacks on efforts by countries to find ways to bypass the US dollar. Some are wondering if the recent moves by Venezuela and Iran mentioned in this recent article will ramp up these new (and different) kinds of "currency wars" even more. Let's take a look at it below.

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NPR.org - Iran May Follow Venezuela in Launching its own Crytpcurrency

Here are the paragraphs from the article we want to focus on:

"There are fears that the rise of state-backed cryptocurrencies could pose a challenge to international efforts to regulate financial transactions and impose sanctions. The countries most interested in the technology – Iran, Venezuela and Russia – are all targeted by U.S. sanctions.

The Treasury Department has warned that U.S. citizens purchasing these currencies may be violating sanctions laws. And just last month, Treasury officials told Congress that rogue states and international criminal organizations are using virtual currencies "to launder their ill-gotten gains."

In a recent email discussion on this news, one the the experts I hear from on issues like this offered this comment:

"Fascinating. One aim - the main aim? - apparently is to "skirt" US sanctions. What will the US do? If the US criminalises use of such a currency who is going to accept it? I was prompted to look up the US Treasury sanctions website  --  what a bureaucracy! It seems there are some 24 countries on the list. If Congress/Admin expands the use of sanctions, further incentives to create alternative currency would clearly grow."

This thought suggests that the US and these other nations looking for ways around US sanctions and alternatives to the US dollar as global reserve currency are taking this new kind of "currency war" quite seriously. How seriously? Take a look at this statement on the US Treasury web page regarding US sanctions now in place:

551. In December 2017, Venezuelan President Nicolas Maduro announced plans for the Government of Venezuela to launch a digital currency. According to public reporting, Maduro indicated that the digital currency would carry rights to receive commodities in specified quantities at a later date. Were the Venezuelan government to issue a digital currency with these characteristics, would U.S. persons be prohibited from purchasing or otherwise dealing in it under E.O. 13808?

A currency with these characteristics would appear to be an extension of credit to the Venezuelan government. Executive Order 13808 prohibits U.S. persons from extending or otherwise dealing in new debt with a maturity of greater than 30 days of the Government of Venezuela. U.S. persons that deal in the prospective Venezuelan digital currency may be exposed to U.S. sanctions risk. [1-19-2018]

There are some who believe that it is so important to the US for the US dollar to remain the primary global reserve currency that the US would go to an actual shooting war over that issue if it felt threatened enough to warrant that. 

For now, it appears that the battle over currencies (and now perhaps state sponsored cryptocurrencies by unfavored nations) will be fought with things like sanctions and tariffs. But this situation does bear watching as more and more nations around the world look at ways to bypass sanctions and undermine the role of the US dollar as global reserve currency. I would imagine that Russia and China are paying close attention.