Why Countries Are Desperate to Bring Their Gold Home

Why Countries Are Desperate to Bring Their Gold Home

From Peter Reagan at Birch Gold Group

This week, Your News to Know rounds up the latest top news stories involving gold and the overall economy. Stories include: The trend of central bank gold repatriation, analyzing gold’s headwinds, and man from Kentucky finds 700 Civil War era coins almost in his backyard.

Central banks want their gold back home

The Deutsche Bundesbank (Germany’s central bank) was really the first to begin repatriating its gold in the post-Great Financial Crisis era. The nation’s gold reserves had been under custodial care in London, New York and Paris. As of 2017, fully half Germany’s gold reserves reside in the Bundesbank vaults in Frankfurt.

The motive?

…in the wake of the US subprime crisis and the emergence of the eurozone debt crisis in 2012, euroskeptic voices in Germany began pressing for an audit of the precious metal kept abroad. They had suspected the gold might have been tampered with, lent out or sold off.

Paranoia, or just common sense? Opinions varied. These days, though, it seems that Germany was just ahead of the curve… Right now, every central bank seems to want its gold back home.

An Invesco survey of 85 sovereign wealth funds and 57 central banks came highlighted a number of worrying perspectives. For starters, 85% can be called either “realistic” or “pessimistic,” as they contend inflation will be significantly higher through the next decade, compared to the last two or three.

Inflation isn’t their only concern, though — 68% of the respondents said they simply prefer to keep their gold nearby. The majority of central bankers polled were leery of financial sanctions:

…last year’s freezing of almost half of Russia’s $640 billion of gold and forex reserves by the West in response to the invasion of Ukraine also appears to have triggered a shift. The survey showed a “substantial share” of central banks were concerned by the precedent that had been set.

Not long ago, I wrote about the role weaponizing the dollar played in corroding the dollar’s global reserve currency status. I wasn’t just blowing smoke.

One central bank, quoted anonymously, said: “We did have it (gold) held in London… but now we’ve transferred it back to [our] own country to hold as a safe haven asset and to keep it safe.”

While many nations are bringing their gold reserves home to safeguard them from future political spats, others are working on a new, global alternative to the dollar.

Inflation, however, is their overwhelming concern. The overwhelming majority, 83% of the 142 respondents, named inflation as their main concern in the year ahead, and only slightly fewer (80%) mentioned geopolitics.

Most interestingly, only a small fraction of 7% see the rapid growth of U.S. debt as a reason to diversify away from dollars – though that small fraction is growing. Furthermore, only 18% said the yuan is a viable alternative to the U.S. dollar, down from 29% last year. That’s a fairly steep fall, and the recent crumbling of China’s economy since the pandemic panic probably tempered their yuan optimism.

The “natural desire to diversify” is alive and well among the world’s central banks. They don’t just want gold, either – they want their gold locked up in a depository in their home countries, where they know with certainty they can get their hands on it.

That, quite possibly, is the least mysterious finding in the entire survey. Personally, I believe that the U.S. debt should be a bigger global concern as well. History’s greatest debtors don’t have a good track record of making good on their debts…

Regardless, central banks tend to move very slowly – like glaciers. Also like glaciers, central banks have unstoppable momentum that leaves the landscape beneath them permanently altered.

No one’s thrilled with $1,950 gold – why?

How disappointed are analysts with $1,950 gold? Well, this overview gives us various problems of sorts in the gold market that the metal is facing right now. Yes, gold has headwinds, but we’ll get to that in a minute.

Either way, gold’s lack of movement is explained by expectations of relative stability in both the U.S. dollar index and the benchmark rate. In the case of the latter, sentiment now appears to have it staying elevated for a while.

The analysis does suggest that there is an end of a Federal Reserve hiking cycle to be thrilled about. But what will follow? A return to quantitative easing (QE) is something that must not even be mentioned so as to not set the markets off. The only remaining thing is for the Fed to hike once again so as to avoid the frightening lack of policy intervention in monetary affairs.

I can’t help but feel that $1,950 is pretty rich to be a cause of dissatisfaction. That means today’s gold price sits above its 2011 high, which was being called a bubble or thereabouts back then. If gold has returned to sit permanently around this level, it speaks to how much currency has been eroded in the meantime. Even just the readily publicly-available examples of central bank malpractice make the stomach churn.

One reason we might be a little disappointed in gold in U.S. dollar terms is that it hasn’t kept up with other currencies. That is to say, the dollar has been very strong for a while relative to other currencies. We know about peaks in the euro and pound-denominated gold prices. But consider: both China and India have seen all-time highs in gold’s price, denominated in yuan and rupees, respectively.

An all-time high in gold’s price usually means your currency is eroding quicker than usual. The U.S. dollar is standing as an example of something that obviously doesn’t look sustainable to anyone. To paraphrase Ron Paul, “the dollar isn’t the best – it’s simply the best of the worst.”

Personally, I don’t worry too much about gold’s price. I believe in its long-term, safe-haven store of value role and try not to get caught up in daily, weekly or even annual price movements. Gold’s price changes, but gold doesn’t change.

Think about that the next time you’re disappointed with gold’s price.

Civil War-era stash of 700 gold coins found in Kentucky cornfield

Just as a reminder that America, too, has its historical sites, we now have the Great Kentucky Hoard. It’s the name of a stash with so much historical significance that it warranted such a name. The newly uncovered coinage consists of around 700 U.S. gold coins minted between 1840 and 1863.

The Great Kentucky Hoard, 700 gold coins discovered in a cornfield

The majority of the hoard is composed of gold dollars from the Civil War era. Image via Numismatic Guaranty Co.

At the time they were buried, this stash of gold coins was worth a little over $1,000.

Given the mintage dates, speculation regarding when the coins might have been stashed and why has reached a fever pitch.

Preparation for the 1863 raid by Confederate commander John Hunt Morgan?

Daniel Boone’s buried emergency fund?

A portion of the money robbed from banks, stagecoaches and trains by the infamous Jesse James and his gang?

No one knows – and Kentucky is filled with legends of everyday folks burying their life savings under a rock in their back yards. The coins themselves offer only a few hints… The stash consists of an array of denominations, mostly $1 “Indian Princess” coins, including about 40 $10 and $20 gold coins. A rare 1863-P $20 coin from the find will go on auction for what could end up being six figures, and there are 18 other coins in the pile that could individually fetch such prices.

Consider, just for a moment, that when these coins were minted, 0.0484 troy oz of gold (1.5 grams or 23 grains) was the equivalent of $1 – as specified by the Coinage Act of 1834. Today, their melt value alone is nearly $100,000.

This fact alone should tell you just how far the dollar has fallen since the Antebellum Period. And the fact that they’re still worth money today should tell you just how resilient gold’s safe-haven, store of value role is.

It’s worth repeating: times change. Gold doesn’t.

2023, central banks, Featured, gold price