While other central banks have been busy increasing their gold reserves, Canada sold off all its gold reserves in 2016. The Bank of Canada ranks last globally out of 100 major central banks.
There is precedence in a central bank selling off its gold, and it didn’t work out very well. In 1999, when the price of gold was low at $282.40 an ounce, the United Kingdom sold half of its gold reserves, worth approximately $6.5 billion. The sale raised $3.5 billion. By 2007, the price of gold had risen to $675.00 an ounce, and the UK had lost more than £2 billion. This financial disaster, known as Brown’s Bottom, did not work out well. And Canada appears to be following in its footsteps.
With many uncertainties globally, Canada’s gold sale could have serious consequences.
Fed signaling interest rate hikes = ✔
Fed shrinking balance sheet = ✔
National debt rising rapidly = ✔
Household debt rising = ✔
Weak growth = ✔
Rising inflation = ✔
Geopolitical risks = ✔
But hey, things are going to be fine… pic.twitter.com/i7Gwk4fe2t
— Gold Telegraph (@GoldTelegraph_) April 24, 2018
In this age of fiat currency, many people forget that gold is actually money, and has never stopped from functioning as a reliable store of value. Gold is a relatively liquid currency and one of the most highly traded.
According to Canada’s senior Finance Department economist Morneau, the reason for the gold sale was the cost involved in storing the gold and the fact that gold offers a poor return. That seems like strange logic since gold has outperformed the S&P 500 since 2000. The price of gold went from $35.00 an ounce in 1967 to over $1,300 today.
As former Federal Reserve chairman Alan Greenspan has said:
Central banks have been big buyers of gold since 2010. The prime buyers have been Russia and China, but most other central banks have scrambled to follow suit.
On the other hand, Canada has now joined developing countries such as Angola, Belize and Tonga that have no gold reserves at all. Is Canada headed for disaster?
Canada’s current reserve position of $10,412 billion in the IMF entitles it to 2.26 percent of votes within the organization. It has reduced its reserve position by $1.2 billion. With the sale of gold, Canada is greatly reducing its voting power in the IMF.
Is Canada’s financial power gradually diminishing along with its gold reserves? It seems to have created a mysterious scenario of “ … and then, there were none.”
Following the sale of its of gold, Canada’s market debt has surpassed $1 trillion in a historic milestone.
This debt is mostly due to the uncontrolled borrowing made possible by the Bank of Canada’s easy lending policies. Canada has a current debt ceiling of $1.168 trillion, and it is anticipated that Parliament will have to increase that ceiling in the near future. According to the government, it has the power to borrow to refinance its massive debt. But borrowing will only serve to increase the already existing mountain of debt further. Canada has become one the leaders in global debt, and its solution appears to be to continue adding to it with new borrowing. Canada household debt now equals 101 percent of its GDP.
Canada is not situated in a good financial place. Any shift in the global economic wind would leave Canada in a very precarious position.
Ironically, Canada’s record debt comes at a time when economic growth is at 3% (2017) which was the highest in six years and many economists expect this to continue.
That optimism, however, is misleading. Canada’s economic growth comes at a time when its total deficit spending has increased to beyond $18 billion. Outstanding corporate credit reached a historic high of $803 billion in 2017.
In addition, Canada is facing a mortgage bubble, with homeowners who bought lavish houses on easy credit now finding themselves unable to afford increased interest rates on their mortgages or being unable to sell a house they can no longer afford.
Canada’s financial policies has been a puzzle to many. While other countries are amassing gold, it has deliberately sold off all its gold reserves, while other countries are attempting to reduce massive debts, Canada appears to plan on increasing its own.
Countries that have historically valued gold have been or have strived to be global powers. The mere ownership of gold has always been a sign of authority. Canada, on the other hand… is flying solo, and might be heading for a crash.