Auronum, a precious metals investment firm, has noted a significant increase in central banks buying gold bullion despite near record high prices in various currencies. The high demand has resulted in physical premiums reaching multi-year highs for investments such as gold sovereign coins. Auronum attributes this trend to several factors including a rise in inflation, devaluation of currencies, and a desire among countries to move away from the US dollar in international trade. The firm suggests that if a gold standard is adopted in certain regions, it will likely result in a surge in gold demand and a central role for gold in world trade.
Gold and silver investors have been vocal in expressing their disappointment with precious metal bullion’s performance over recent months. Gold, after all, posted seven consecutive monthly losses in 2022 which is a record losing streak not seen since 1869. More articles are being published showing that central banks are aggressively buying gold bars and coins to accumulate physical bullion reserves. The pace of purchases is what has caught the eye of many market analysts given that central banks just accumulated gold reserves at a pace last seen in 1967 which was when the developed world was on a gold standard. The latest sign of increased demand has come in the rise of physical premiums in gold coins and bars which, have reached multi-year highs for investments such as gold sovereign coins.
For perspective, a total of 1,404 tonnes of gold was bought in 1967. The World Gold Council reported purchases have increased to 673 tonnes, surpassing all annual totals since 1967. Q3-22 set a record for gold bought by central banks in a single quarter. Many are questioning what factors are causing the central banks to buy gold bullion despite prices being near record highs in many of the world’s currencies. The US government freezing Russian assets after the invasion of Ukraine was a development often cited for increased gold bullion bar demand. Countries worry about being subjected to US sanctions in the future and so are divesting assets denominated in dollars to increase their investments in physical gold bullion as this is out of reach of sanctions. The larger buyers in 2022 were Turkey, India, Uzbekistan, Egypt, Qatar and Iraq.
The high inflation is another factor as governments used deficit spending after the voluntary lockdown of their economies due to the pandemic. This has accelerated the debasement of currencies relative to commodities and other asset classes. However, there are other reasons to why sovereign entities and individual investors would want to increase their gold bullion bar and coin holdings. As countries struggle with fiscal budgets, their governments are likely to tilt their economies towards increasing exports and reducing imports. The quickest way to do this is to devalue the currency.
In fact, the worse an outlook becomes for global growth the faster this process may unfold as countries become more desperate to improve their balance of trade with other nations which will encourage retail investors to place more of their wealth into physical gold and silver bullion. Moreover, in the battle to starve increases in consumer prices, central banks have been raising interest rates at a rapid pace which is starting to impact the real economy as business borrowing costs and mortgage interest payments for consumers rises. This may prove to dampen economic activity further and result in interest rates being lowered in turn boosting gold prices given that a lower interest rate decreases the opportunity cost of holding gold bars and coins instead of holding cash on deposit.
The final point to consider for gold and silver investors is that many Eastern economies are looking to underpin international trade with something other than the US Dollar. It is unlikely that another sovereign currency replaces the US Dollar in world trade because that currency will benefit that nation at the expense of others that are forced to adopt it for their trade and gift them the same power that the US government is currently exploiting. However, there is a strategy which best satisfies all nation’s interests and leads to what economists would consider a ‘Nash equilibrium’ where no nation would benefit from unilaterally changing their strategy. This is to revert to a gold standard.
A gold-backed currency is often championed as being the best solution because no single nation gets to print the reserve currency at the expense of their trading partners which have no choice but to hold the currency due to trade obligations. By extension, the devaluation of currencies for competitive advantages in trade is also removed from the equation because sovereigns cannot print gold. The other issue that a gold standard fixes is that if everyone devalues at the same time, which has been seen in the West over recent decades, then no nation benefits. Whereas if everyone agrees to back their currencies to gold which no central bank can print, then no nation on the gold standard can manipulate exchange rates leading to a level international playing field that does not favor any one player over another. This is the Nash monetary equilibrium and may be why Eastern central banks have been aggressively buying gold bullion.
Investors should position themselves for this structural shift in international trade because if a gold standard is adopted in certain strategically important regions, then gold demand will increase exponentially. With mining supply constrained by geology, the demand can only be satisfied by prices rising high enough for sellers of existing gold bars and coins to want to sell their bullion into the market. Given how central banks are accumulating gold and how many key nations are looking for an alternative to the US Dollar to settle cross border transactions, it is very likely that gold will play a central role in world trade for generations to come.
Disclaimer: This press release may contain forward-looking statements. Such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements
Original Source of the original story >> Gold Investors to Follow the Money with Record Central Bank Gold Buying