The Goldfinger Effect: Unraveling the Central Banks' Gold Accumulation Strategy
6 de jul de 2023
With geopolitical tensions on the rise, Central Banks are hoarding gold like never before. What's sparking this global gold frenzy?
Remember Goldfinger? He was a classical Cold War villain from the James Bond saga.The ‘wealthiest man in England’ due to the immense gold reserves he amassed through obscure means. And, of course, he had a masterplan to bring chaos to the world: “Operation Grand Slam”. Goldfinger planned to infiltrate Fort Knox, the impenetrable U.S. gold depository. Not to steal gold, as it would be too heavy to transport,, but to contaminate it with a nuclear weapon, rendering the reserves useless and immensely increasing the value of Goldfinger’s own pile, creating a global economic crisis.
We recall Goldfinger, as a hyperbole of some recent world events. There’s no (known) villain with a masterplan for global chaos here, but there are smart agents playing their hands in the global economic game. These agents are central banks, and they are hoarding gold. A lot of gold.
1. Why do central banks own gold?
Historically, gold has been used either as hard money or as an asset backing fiduciary money. But this all ended in 1971, when President Nixon unilaterally took the USA out of the Bretton Woods system. Since then, gold has faded in relevance as “hard money”, and central banks emerged as the true guardians of finance, creating capital on their balance sheets - what is called the fiat money system.
But this system relies on mutual trust in order for money to hold its value, since it is not much more than numbers recorded on accounting books. And trust is something that has been declining in recent years. First, the COVID-19 pandemic and the disruption of global supply chains (or, as some have been calling them, “surprise chains”). Then, geopolitical tensions amounting all around the world. The war in Ukraine paid a huge tribute to this trend, as Russian Central Bank reserves held in foreign banks (as is common practice) were frozen as part of the Western sanctions on the Russian Federation.
The alarm bells of central bankers started ringing. Increased volatility in foreign currency exchanges? The trustworthiness of a financial interdependent cross-border system? These and more prompted many financial leaders to look for an asset which could protect their reserves and protect sovereign wealth against volatility. And that is gold.
2. Yes, sure, but why gold?
Gold plays an important role backing assets for various reasons. The first is tradition: gold has typically served both as a currency and as the basis for dozens of strong currencies. And despite the abandonment of monetary systems based on gold, central banks have never given up on their gold reserves.
It also plays an important role as a store of value. Gold bars have retained their appeal through volatile times, preserving wealth under stormy weather, as thoroughly explained in our post about gold as an inflation hedge (link to the post)..
Then, liquidity: the gold market is a highly liquid market, for which there is always limited supply (after all, it is a rare mineral) and there is permanent industrial demand.
For these reasons, it also helps to diversify a central bank’s portfolio, thus reducing its risk. If foreign currencies, sovereign and corporate bonds, the assets composing the majority of a central bank’s balance sheet become more volatile, then increasing the percentage of gold can provide a powerful hedge in times of crisis.
Such moves tend to increase investor’s confidence in the strength of a central bank’s firepower. And with increased confidence comes greater independence from foreign currencies.
3. The geopolitical end game
Now, back to Goldfinger. He was a tycoon from the Old World and his attack on Fort Knox was an attack on the economic might of the USA and the fragile foundations of the era’s global equilibrium.
What’s interesting today is that it’s not the “Old World” that is hoarding gold. It is the emerging potentates that are doing so. From Singapore and Turkey to India and Uzbekistan, without forgetting China, which, more than any other, has been leading the growth in gold reserves.
For these countries the stakes are high. Many of them have been quite vocal about the need to reduce their reliance on the US economy. and the US Dollar. In times of increased volatility and higher inflation, this seems like the perfect play, reducing these countries’ exposure to any future instability emanating from America.
After all, the economic game is still a game. And gold shines as always, retaining its eternal appeal as a safe asset to protect against financial turmoil.
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