If Gold isn’t Money, Why do Central Banks Have Tons of it & Keep Buying More?

(August 8, 2018 - by Peter Schiff)

Does gold still matter?

A lot of people dismiss gold and precious metals as irrelevant to the world monetary system. But how can money be irrelevant?

Liechtenstein-based Incrementum AG managing partner Ronald-Peter Stöferle joined Mises Institute president Jeff Deist to talk about all things gold, including why it is still money and an important part of the global financial system. 

Deist and Stöferle also talk about why the IMF still worries about the yellow metal, how gold might react to rising interest rates and why it seems to be flowing from West to East.

“Central banks have a kind of paradoxical task because they have to explain to their people that the currency, be it the dollar, be it the euro, the yen, whatever, is great, but still they’re holding quite a lot of gold. I mean for industrialized countries, they’re holding roughly 20% of their total reserves in gold. So if it’s useless, as most central bankers would say, why do they still hold it?”

“If [gold] wouldn’t be money, why does the US have 8,100 tons? Why does the IMF have 3,000 tons? Why does the euro system hold more than 10,000 tons of gold? Why has Russia tripled its gold reserves in the last 10 years? Why is China buying every piece of gold that’s not nailed down at the at the largest mining production in the world and they don’t export any gold at all?”

“The central banks do not really enjoy talking about gold and its monetary aspects because of course, they have to defend their fiat currencies.”

“I think what is currently happening, we describe that with this term of de-dollarization, which is going on, which is a long process of course. And I think when it comes to gold, gold plays a major role in that process.”

“Gold just helps people with securing purchasing power.”

“I think it’s no coincidence that gold, on every continent, in every culture, in every religion, plays a very, very important role. And I think the market throughout history, throughout centuries, has decided that gold is something special.”

“Money used to be, ‘I owe you gold.’ Then it became, ‘I owe you nothing.’ And the SDRs [IMF Special Drawing Rights] is, ‘who owes you nothing.’”

“Over here in the eurozone, when they introduced the euro, in the whole campaign of explaining the euro and the concept of the euro, they really often told people the euro-system holds more than 10,000 tons of gold to create trust in the new currency.”

“I think the next big crisis, that will happen sooner or later, of course, might really be not a cyclical crisis, not a financial crisis, but a currency crisis.”

“Those headwinds that gold is facing, they will become tailwinds when recession fears come up, when the market realizes the emperor has no clothes, because let’s face it, the superficial stability of financial markets only depends on the faith of market participants in central banks, in the whole monetary philosophy, in their power to manage the market. And I’m pretty certain that if the Fed fails with its normalization efforts and the US falls into recession, which is our expected scenario, then there will be a severe loss of confidence in central bank-administered monetary policy.”

“This is probably the perfect storm for gold if this tide of the turn is happening.” – Peter Schiff

Some Mainstream Bullishness on Gold

With the price of gold dropping over the last few months, there’s a lot of bearishness out there in the marketplace. But there is some bullishness on gold, even in the mainstream.

A strategist with ICBC Standard Bank said he sees gold climbing back to $1,300 by the end of the year. According to a report published by Bloomberg, Marcus Garvey said bullion may average $1,260 in Q3 and rebound further toward the end of the year as physical demand emerges. And while he does expect the Federal Reserve to move forward with two more rate hikes this year, he said the market has already taken this into account. 

We are going to see almost certainly two US interest rate hikes come this year, but they are already, if not fully priced, fairly nearly. So there isn’t a huge scope for a surprise there.”

The World Gold Council recently released a report projecting stronger overall demand in the second half of the year, particularly in India, China and other emerging economies.

Garvey said if current market dynamics persist, gold could dip briefly below $1,200, but then he expects a rebound. He echoes something we’ve been saying – these low prices may be a buying opportunity.

Looking at the next six months, we are actually around the bottom for this cycle already, so it is more suited in the long term for investors as a decent level for purchasing for their portfolios.”

Garvey brought up another point we’ve been harping on. Even though the pretty much everybody thinks the US economy is great, there are concerns over credit stress, making it questionable whether the US consumer can withstand materially higher interest rates. In other words, rising interest rates don’t bode well for an economy built on a pile of debt.

Pacific Investment Management Co. Nic Johnson also expressed some bullish sentiment about gold in a blog summarized by Bloomberg.

Falling gold prices in the absence of rising real yields suggest the metal has cheapened versus other US-denominated haven assets. That along with comments by President Donald Trump ‘lamenting the strong dollar’ could reignite interest in the metal.”

Northern Star Resources CEO Stuart Tonkin told Bloomberg he sees an increase in the dollar price of gold due to shrinking supply. He said global output may have peaked.

Even that slight scarcity, or the view of a declining profile” of production, reserves and resources among the biggest companies will keep a base under gold.”

Northern Star ranks as the number three gold producer in Australia.

As we reported last week, through the first half of 2018, gold production appears to be falling while the cost of mining the yellow metal continues to increase. Three of the world’s biggest gold mining companies all saw production fall in the first six months of the year.

While the headlines seem to be pretty bearish, even some people in the mainstream recognize this as potentially a good time to buy gold. The fundamentals seem to support the bullish position.