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WHAT DOES THE WORLD KNOW ABOUT GOLD THAT AMERICANS DON’T?

Recently the World Gold Council released new 1st quarter data for 2019 relating to Central Bank purchases of gold. They were blowout numbers that hardly seem to stir complacent American investors.

For the 12 months ending March 31, central banks of the world purchased 715.7 metric tons of gold, the biggest surge in gold purchasing in 50 years.

What was going on 50 years ago?  In August 1971, President Richard Nixon “closed the gold window” and unilaterally reneged on a promise to redeem US dollars in gold, as per the 1944 Bretton-Woods Treaty. This decision gave birth to five decades of inflation and the end of fixed exchange rates.  Thus, the final monetary discipline of the gold standard was ruptured giving us floating exchange rates and chronic inflation.

Not surprisingly, the subsequent lack of monetary discipline uncorked 50 years of almost non-stop deficit spending, which has now resulted in more than $22 Trillion dollars in National Debt.  There is some historical indication that Nixon at first thought his decision would be temporary, but neither he nor any of his successors ever tried to return to any semblance of the gold standard.

It would appear that the less institutional restraint on spending and deficits, the better according to America’s political leadership.

Part of the problem was the US was running huge deficits to fight the Vietnam war and politicians wanted to continue to expand the Great Society at home.  The result was Bretton-Woods arrangements could not hold. It was default and devaluation and foreigners had every reason to buy protection in the form of gold.

Of course, Americans as well saw the falling dollar and domestic inflation and the popularity of gold and silver grew extensively.

But today, Americans are very complacent about inflation and have supreme confidence that the Federal Reserve can fine tune the economy.  We have reached a point of a  “Planned Crony Capitalist Economy”, where it is expected the Federal Reserve will intervene successfully anytime either the economy or the stock market turns down.  Bailouts are now expected by the market place.

But within this complacency, somebody obviously is not being so complacent.  Foreigners are buying gold.  This is true not only of their central banks, but also public investment as well.

It is also interesting that gold bullion exchange traded funds (ETFs) that trade in Europe and Asia also tend to show growing net assets while those that trade in the US tend to show a loss in net assets.

 

european-goldbacked-ept-aum

 

Likewise, futures positioning in the US among speculative longs (hedge funds, mutual funds, etc.) also show a reduction in activity.  In short, there is little interest in gold right now in the United States but those outside of the US seem quite interested.

Well, we seem to have a reasonable explanation why central banks bought gold 50 years ago, but what would cause them to ramp up purchases now to the emergency levels of 50 years ago?  Why are foreigners adding to their bullion holdings both institutionally in their central banks, and among the public participating in ETFs?

This is not an easy question to answer.  In a world that is so wired together as it is today, it would seem that news of record US deficits, problems in Social Security and Medicare, underfunded pensions and so forth, are facts known both to domestic investors and foreign as well.  It is doubtful that foreigners are in possession of superior information.

So, if they are not in possession of superior information, why are they buying?  Most likely they have a different perspective than we do inside the US.

Foreigners have more experience with unstable governments and currencies than we do. It would be an understatement to say we are blessed to be living in the United States.  Long term returns for equities have been higher in the US, and wealth more secure, than in most countries that have been plagued by frequent political upheaval and currency debasement.  We have been the biggest, the freest, the strongest, and with the most stable government.

And it is also likely true that many foreign nations have more experience with the failures of socialism while in the US, a new budding romance for socialism seems apparent.   For them, the US and the US dollar has been their safe haven against their own domestic political and economic mismanagement.

What they likely see are the same problems they have grown familiar with and fearful of, this time coming to the US.

If the US is less likely to prove to be a safe haven, then they are looking for the only reasonable alternative, gold.  Gold remains the only non-national currency that is held as a bank reserve.

Why does it make a good reserve?  Because it is not someone else’s liability and cannot default.  Gold is rare and cannot be printed in any quantity out of thin air by government.

But even this explanation leaves one not completely satisfied.  Can outsiders really be more dispassionate about evaluating trends in the US than those of us inside the country? Yes, sometimes you can be so close to problems that you have been dealing with, that complacency does set in and a different perspective can be had only by those not so intimately involved.

Sometimes only a friend looking from the outside can tell you that you are acting like a fool.

INFORMATION IS DERIVED FROM RELIABLE SOURCES BUT CANNOT BE GUARANTEED.

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