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Central Banks Could Be Planning Something Huge for Gold Investors

Central banks broke historic records with their gold buying over the last 15 months. Why? Inflation resistance? Diversification? A hedge against de-dollarization? Today we discuss a totally different possibility…

Central Banks Could Be Planning Something Huge For Gold Investors

From Peter Reagan at Birch Gold Group

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Central banks could be planning modernize their gold reserves, Wheaton CEO’s gold and silver predictions, and BlackRock's analysts on gold’s near-term prospects.

Accounting tricks and central bank gold “revaluation”

Rick Mills' attempt to explain how a gold revaluation account (GRA) works is a lengthy and convoluted affair, mostly because the subject matter is as well. I‘ll take a minute to summarize the concept because it’s relevant not only to central bank gold reserves, but also to the ongoing banking crisis.

Accountants assign value to an asset in different ways:

  1. Based on the asset’s current market price (this is called “mark-to-market” pricing, and by far the most common way of assessing value)
  2. Based on the price paid for an asset (that’s considered “cost basis,“ explained briefly here)
  3. Based on the expected future value (called “held to maturity”)
  4. …something else

Here in the U.S. for example:

The Department of the Treasury records U.S. Government owned gold reserve at the values stated in 31 USC § 5116-5117 (statutory rate) which is $42.2222 per Fine Troy Ounce of gold.

So the U.S. gold reserve's 261.5 million ounces of gold has A stated value of $11 billion. But its actual market value is $512 billion. That’s a big difference! (Don’t get too excited, though – that’s less than May 2023’s federal spending.)

What’s the point? Simply this: by realizing the actual market value of gold reserves, central banks could realize the gains on the value of their gold reserves. Mills speculates this “capital” thus created would be used to offset sovereign debt and maybe even for writing off liabilities.

Keep in mind that most Western central banks obtained the majority of their gold bullion reserves during the Bretton-Woods era, when gold was $20-$40 per ounce. So the U.S. example of a 45x increase in the actual value of a nation’s gold reserve is not that unusual.

So why aren't central banks profit-taking now that they're massively indebted, insolvent for all intents and purposes?

The official explanation is that central banks do not consider gold to be money. Mills says:

The U.S. has long opposed a gold revaluation dating back to the 1970s, as this would damage the dollar’s status as the world’s reserve currency.

Unofficially, well, central banks fear changes in gold price. A bad month for gold could turn this massive upside into a massive downside. (Think of it as a savings account turning into a mortgage.)

However, this line of reasoning doesn't really hold up. Selling just a part of their holdings would protect them from any loss they might incur. And it seems that central banks might be looking to do just that. The Dutch central bank said it isn't worried about its close-to-negative balance sheet seemingly only because of the gold in its portfolio, which amounts to some $20 billion. The Bundesbank, Germany’s central bank, said they're viewing gold revaluation as a way of dealing with their central bank’s fiscal situation.

European banks have legislation that's meant to prevent this action from happening yet, as Mills notes, seems there only to be changed as-needed. The U.S. has no such legislation, but faces its own issues in the form of having to maintain the reserve currency's credibility and name value. The central bank of Curacao and Saint Martin, burdened by neither, recently used its GRA for precisely this purpose.

Ultimately, where is all this leading?

Citing Jan Nieuwenhuijs, Mills believes:

this an indicator of European banks preparing for a new “gold standard” through a revaluation of gold. To do that, though, gold must be spread evenly across the Eurozone countries so that everyone can benefit to the same degree.

This certainly explains the record-setting central bank gold purchases we’ve seen over the last 15 months!

Let’s end on a final quote:

Gold reserves evenly spread across nations, proportionally to their GDP, allows a smooth transition towards a global gold standard.

Wheaton CEO: Gold is great, but don't overlook silver

Randy Smallwood, CEO of precious metals streaming company Wheaton, likes gold and silver as more than just a regular investment. And not without reason: his company revolves around funding mining operations and then buying back the precious metals at a discount. This amounts to hundreds of thousands of ounces annually.

When talking about gold, Smallwood seems most captivated by its staying power:

I mean that's what gold has been forever, a store of value, a measure of value that lasts. It's not subject to political influence, and that's what gold has always provided, that's what precious metals have always provided: you can't copy it, there's only one, there's only one gold, there's only one silver, and as a store of value it's just, it's lasted for thousands of years, and it will last for thousands of years.

Though he mentions silver in there, the appeal he sees in silver is more layered. Perhaps because of his tenure on the World Gold Council, Wheaton is very much aware that silver is already in a supply deficit, and believes that this has yet to materialize in terms of price movement. While silver's supply picture has always been lackluster, with the metal being a byproduct of mining other metals, the issue has gained added prominence lately.

It seems we're hearing more and more just how undersupplied silver is compared to gold. Part of this is, of course, related to there being a sizeable annual deficit. And how to remedy the situation? As of latest news, silver production in Peru fell by 7%, and they're the third largest silver producer in the world. A supply squeeze would theoretically increase prices, but unlike in the case of gold, there is no "open a new mine" response to the problem.

Here's why BlackRock likes gold right now

BlackRock's analysts recently explained why gold has been doing well, and seems ready to continue doing so.

As they noted, the metal fell from $2,050 after the debt ceiling agreement. But how much of a factor, especially in the long-term, did debt ceiling fears really play in gold being priced so high? Did anyone really believe that, this time around, the debt ceiling wouldn't be raised after a century of just that? Furthermore, the losses came after a 30% gain from gold's 52-week low, and gold remains 8% up this year.

Interestingly, BlackRock is bullish on gold despite not sharing the consensus view that the U.S. will cut rates this year, finding that scenario too detrimental for the dollar. Even a mere pause, however, should be enough to keep gold around the $1,950 level. From there, gold is obviously going to play a waiting game to see how long the Federal Reserve can afford to keep rates in recessionary territory.

BlackRock also highlighted gold's almost nonexistent correlation with other major asset classes, which they believe could be even more important than its role as a hedge against inflation. Geopolitical tensions seem as likely as ever to rise in the relative near term, as the upcoming Presidential election will focus on both the Russian invasion of Ukraine and attempts to prevent China from shoving the U.S. aside on the global stage.

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