The Change of heart by Countries & Investors towards the precious metal
The precious yellow metal has acted as a store of value and a medium of exchange for centuries. For a good part of the 18th & 19th centuries, the gold standard was in effect in most of the western countries of the World. England became the first country to officially adopt the gold standard in 1821 — the term refers to a monetary system in which the value of the currency is based on gold, which was the US Dollar when the system was completely abolished in 1971.
The widespread industrialization, increase in global trade & economic growth brought opportunities for discoveries of large amounts of gold which kept the standard intact in the 19th century. The two World Wars and the onset of the Great Depression in the 20th century dramatically changed the economic landscape of the Globe & new system in the shape of the Bretton Woods Agreement was conceived.
The Bretton Woods Agreement acted as a framework for global currency markets until 1971, according to which all global currencies were valued in relation to the US Dollar — World’s reserve currency. Dollar, in turn, was convertible to gold at $35/ounce. The agreement, in turn, created an inverse relationship between the Greenback & the precious commodity where money flow in one caused a drop in the value of the other (chart above).
The denomination of US Dollar in Gold didn’t last too long either as countries began to progress after the end of the Second World War with the need for increased demonetization of debt needed for the social programs. The Vietnam War also converted America’s surplus into a deficit.
With the unwillingness of member nations to maintain the market price at the U.S. price of gold, the Gold Pool collapsed. Forced by other nations to be paid in Gold, U.S decided to end the relationship of Greenback to Gold, formally entering the era of fiat money post-1971.
For the next 40 odd years, the Central banks continued to sell their Gold reserves for fiat money. The accumulated reserves were sold to fund the social & development programs. Then something strange happened — starting in 2010, the Central banks of the World started amassing gold. So from net sellers, they became net buyers.
This is a significant reversal of policy considering gold is considered a hedge against economic uncertainty & market downturn. The following infographic shows the gold holdings of different countries around the World.
According to the Data from Gold.org, U.S owns the largest gold reserves followed by Germany & IMF. Although China is the largest producer of Gold, yet its reserves are dwarfed by other nations. Having said that, China & Russia have been the most aggressive Gold buyers since 2014. Here’s a list of the top holders of gold currently.
1. United States — 8,133 tonnes — $373,430,444,426
2. Germany — 3,369 tonnes — $154,711,817,616
3. IMF — 2,814 tonnes — $129,198,164,458
4. Italy — 2,451 tonnes — $112,568,606,829
5. France — 2,436 tonnes — $111,843,187,142
6. Russia — 2,168 tonnes — $99,552,373,843
7. China — 1,885 tonnes — $86,568,279,703
All savvy investors follow the rule of diversification for their financial portfolios. An asset allocation that combines uncorrelated assets of real estate, commodities, and cash beyond the traditional asset classes of stocks & bonds is always a prudent choice. Gold, however, is considered the best option in the uncorrelated assets category.
Why is it such a popular choice for bringing sanity to your portfolios when things go haywire in the financial markets — It’s not only because it is a store of value, it has traditionally been a safe haven asset & in some cases a hedge against inflation as well, which lowers the volatility of your portfolio. Historically speaking, whenever the stock markets go south, the price of gold appreciates.
Take it from the billionaire investors who have followed the lead of the Central banks to add gold to their portfolio holdings. Big Hedge fund names like Ray Dalio, David Einhorn, John Paulson, and John Tudor Jones II are advocates & holders of gold.
They actually suggest that all investors should keep 5–10% of their portfolios in gold. The newest entry to this Club this year is Sam Zell — the real estate kingpin who invented the real estate investment trusts (REITs). He took up a significant position in gold stating it is a good hedge with a shrinking supply.
While the central banks & billionaire investors continue to amass gold for hedging purposes, the souring investor sentiment from the ensuing trade war between the two biggest economies & a dwindling supply of the precious metal not only reflects the increase in the price of Gold, but it’s utility as the safest bet to weather financial storms and turbulent economic times. The important question is why this move now… Are we gazing at another financial crisis?
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