“Well, you know what’s interesting…Gold is still significant. I ask myself if it’s a relic why is there a trillion dollars held in Gold by the world’s central banks plus the IMF and all the other financial institutions? If It’s worthless and meaningless why is everybody still holding it?” – Former Chairman of the Federal Reserve Dr Alan Greenspan, Apr. 2018 (Source: World Gold Council)
The Russian Gold purchase news this week further underlined the above. In an uncertain world, where control is concentrated into fewer hands’ sovereigns continue to act in a risk averse manner. Increasingly, Gold is seen as a key way to further move away from the US Dollar. As the world’s reserve currency, the US Dollar has significant economic power (rates, most favoured medium of exchange, world’s deepest and most trusted capital market) but also political power in the form of sanctions or access to the world’s payments systems or global banks. The knock on effect is that many countries are trying to diversify reserves away from the Dollar:
- French President Emmanuel Macron said in an interview with CNN in November that European corporations and entities are too dependent on the U.S. currency, calling it “an issue of sovereignty.” Last year, Poland and Hungary surprised analysts by making the first substantial Gold purchases by a European Union nation in more than a decade. (Source: Bloomberg)
With little alternative in the fiat currency world (the Euro is barely 20 years old, the Pound and Swiss Franc are not big enough, the Yuan is not trusted sufficiently yet, and the Yen is already a big part of reserves) it comes as no surprise the alternative is Gold.
Russia’s further purchases of Gold recently now mean it has quadrupled its reserves within a decade to almost 20% of its total foreign exchange reserves (Source: World Gold Council). At the same time, the US Dollar holdings by Russia have fallen from mid-2017 to a 22% share of its reserves pot (Source: Bloomberg). That’s a staggering drop and underlines a real intention to move away from the dollar-based system. After all, as Macron says, this US Dollar dominance is about sovereignty.
That leads to the discussion of what are the alternatives, the key one being Gold. Gold has been recognised for thousands of years as a medium of exchange and store of value. It’s the only currency transcending history and culture. And it is finite. Furthermore, for the first-time last year the purchases of Gold exceeded mine supply. Thus, there is a clear mandate and intention from the very top, from the most powerful financial actors, states themselves, to diversify their holdings into Gold.
Historically the main issue with Gold has been its portability and use in daily transactions. With technology moving so fast, paying in Gold will soon be a reality – swift and easy – without the need to physically move the gold itself. It allows for reallocated in real time.
Once this technology becomes ubiquitous and adopted by key players Gold becomes more than just a store of value for reserves, but a true transactional currency. In this scenario, Gold fulfils the criteria of what a currency should do, including and most importantly, that it cannot be debased by politicians or central banks. And, when cutting edge technology meets and merges with human culture and history, its power and potency should never be underestimated.
As the world looks for more and more alternatives to the Dollar whether its bitcoin and its 800+ copy-cryptos or other sovereign currencies the issues remain the same. Neither can be totally trusted. Governments and Central Banks have and will continue to debase, manipulate or print their currencies in order to pay off debts.
Many other countries have little history or the required legal systems of recourse that are strong enough to maintain long-term investor confidence in the stability of a currency. And that’s before issues of expropriation or confiscation.
For cryptocurrencies, the space is still too new, with volatility are too high for any meaningful alternative to the US Dollar. Furthermore, a high number of scandals and outright frauds as well as no centralised authority or wholesale acceptance as a “proper asset” continue to make the space, while fascinating, a “no-go” zone for sovereign actors.
With Gold however, such a centralised authority is not required. In fact, it is necessary for Gold to retain its place to not have one. Gold’s authority comes from its longevity – overall aspects of human history and culture – that makes it especially unique. And thus, no surprise it retains and increases its lustre in this highly political and volatile world.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.