Gold is being recognized as money again by Central Banks

Central banks seem to be in the news a lot. But does anyone actually know what their function is? Central banks control money, pure and simple. They determine a country’s money reserves (the amount of currency regular banks keep in their vaults), interest rates, and they print money, which invariably affects the rate of inflation. Every time you make a loan payment, the central bank has determined the interest.

For some time, global central banks have also been hoarding gold. As a matter of fact, they are one of the world’s largest gold investors, with holdings exceeding 30,000 tons of the yellow metal. Central bank gold purchases for the first ten months of 2018 were 351.5 tons, a 17 increase for the same period the year before. The question is, why are regulatory agencies such as central banks turning into investors?

Gold has historically been a hedge against economic downturns and inflation. Reserve gold is excellent diversification against a devaluing currency, and central banks have taken note. With increasing global uncertainty, gold may be the one certainty that will retain its value. In addition, it is a liquid investment which has a proven throughout history to be a reliable store of value.

Some countries, such as Russia, Kazakhstan, and Turkey, have been in the gold-investment business for a long time. Others, including third world countries, have also been buying up gold. Between the first quarter of 2017 and last quarter of 2018, Russia has been unusually aggressive in adding 450.9 tons to its reserves. One reason might be self-protection. With a number of U.S. and other western countries imposing heavy sanctions against Russia in an effort to control its behavior, it may view the accumulation of gold as being in its own economic interest. Concurrent with its gold purchases, Russia has been ridding itself of U.S. Treasury debts. This puts Russia in an excellent financial position in the event it attempts to devalue the U.S. dollar, which many believe is Russian long-range goal.

Poland’s interest in gold is recent, after years of indifference to the metal. It, too, could be concerned about global economic uncertainty, looming trade wars, and the potential results in the event of Brexit. In times of upheaval, gold will be one of the few commodities to retain or increase its value when stocks and other investments are likely to become volatile.

Like Poland, Hungary has developed a new-found interest in gold. The country’s central bank has recently increased its gold reserves by 1000 percent, or ten-fold. It has stated that gold is a “major line of defense under extreme market conditions …or geopolitical crisis.”

Another country with a renewed interest in gold is China. Its central bank, the People’s Bank of China, added 1.8 tons of gold to its reserves, the first such major purchase since 2016. At the same time, like Russia, China has been dumping U.S. Treasury debt onto the open market, causing concerns about possible devaluation of the U.S. dollar.

These are definitely bullish times for gold. Gold has always served as protection during turbulent times. The question is, what kind of turbulence is apparently being anticipated by global central banks? Interestingly, while global central banks have been in pursuit of gold, the Federal Reserve Bank has yet to join the gold rush. Could it be missing a few obvious economic signs?