In the notoriously opaque world of government gold trading, it’s not always immediately clear who the biggest buyers are. Monetary authorities are such big players that they can skew the whole market by showing their hands, one of the reasons prices fell in the 1990s and 2000s when some of Europe’s central banks sold off. ‘unison.
However, there is one obvious commonality between the declared buyers: all come from countries facing serious problems. Turkey, whose lira fell 52% in the year to September, added 95.5 tonnes to its gold holdings over the same period. Egypt bought 44.8 tons while its pound fell by 20%. India’s purchase of 40.5 tonnes was accompanied by an 8.7% weakening of the rupee. The Iraqi dinar is pegged to the dollar, but credit default swaps protecting against non-payment of its debts jumped nearly 9% in September, even after buying 33.9 tonnes of the metal.
It is a curious situation. The piling up of bullion in the central bank vault has long been a powerful signal to investors that a government is going to be a prudent and reliable borrower. No amount of buying gold, however, will convince anyone that the financially incontinent Egyptian government is good credit. US 10-year Treasuries, currently yielding 4.2%, also seem a much better proposition than a metal that pays no interest, especially now that gold no longer outperforms the total return on government debt.
Bullion bars have one crucial advantage: unlike bonds, they don’t tie you into a relationship with an unreliable counterparty. US government debt was once the hardest form of money, a truly risk-free investment. Then, in February, coordinated sanctions against the Russian central bank vaporized most of the $498 billion in reserves on its balance sheet. The European Union is now considering using those funds to pay for Ukraine’s reconstruction, Bloomberg News reported last week. In a world where you can’t trust anyone, it makes sense to shield yourself from bullets with metal.
Seen in this light, the purchases of Turkey and Egypt are highlighted. Although the two nations are key allies of the United States, they have seen their relationship deteriorate significantly over the past decade as their governments have found themselves more sympathetic to the rise of authoritarian powers. The way forward for international relations is more uncertain today than it has been for decades. It makes sense in this world that central bank reserves should not be too heavily committed to ties with any particular country.
The behavior of these small countries is also an indicator of the identity of the biggest buyers in the market. Reported buyers represent only about 120 tonnes of the 400 tonnes bought by central banks in the September quarter, but you can get a good idea of the other candidates by looking at which countries have accumulated the largest current account surpluses. (These surpluses, after all, are the balances governments use to buy their foreign exchange reserves.) Outside of Europe, which halted large-scale bullion purchases decades ago, the major players are all countries whose ties with the United States are fraying because of the day: China, Russia and Saudi Arabia.
The dollar’s role as the world’s primary medium of exchange remains unassailable. According to the Bank for International Settlements, some 88% of foreign exchange transactions have involved the greenback this year. Yet its share of central bank reserves has fallen rapidly, from 65% at the end of 2016 to 59% earlier this year.
It’s almost certainly the result of Washington’s increasingly muscular take on its monetary dominance in recent years, whether it’s forcing French banks to obey US sanctions, forcing Hong Kong politicians to be paid with piles of banknotes or to block Russian reserves from the world economy.
Such a situation makes gold an attractive alternative. Even then, however, there are risks. Venezuela is currently embroiled in a three-year series of court cases in London over whether its de facto president or political rival should control its bullion reserves in the city’s bank vaults. So far, opposition leader Juan Guaido, who is recognized by the British government, appears to be winning. When the zombie apocalypse arrives, even gold might not be enough to save you.
More from Bloomberg Opinion:
• Funds turn sour when you least expect it: David Fickling
• Gold’s strange behavior shows it’s not a safe haven: Jared Dillian
• Russia’s money is gone: Matt Levine
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.
More stories like this are available at bloomberg.com/opinion
