Crypto Market Commentary
22 March 2020
Doc's Daily Commentary
The 3/18 ReadySetLive with Doc and Mav is listed below.
The New Gold Standard
Gold has historically been the safe haven asset after the world converged on it as the globally standard monetary asset. Gold has been the cornerstone of economies dating back to the Egyptians, Mayans and Romans and persisted as the core of the financial system up until 1971.
What happened in 1971…These charts tell the story better than I can https://wtfhappenedin1971.com/
1971 was the year that the United States finally severed the gold standard in its entirety. No longer was paper money based on some exchangeable value of gold nor was it even pegged to gold. Fiat currency became a free floating phenomena where markets decided the relative value of currencies by the stability and productivity of the government that backed them.
After breaking the gold standard, gold basically mooned. This can be thought of in two ways, gold grew in value OR the dollar lost value. The latter is more correct as fiat money is an unsound money where the inflation rate is arbitrary and set by authorities.
In the modern financial system, gold still maintains a crucial role. It remains one of the most liquid investment vehicles and has historically stored its purchasing power. There is an old saying that you can always buy a top of the line suit with the same amount of gold no matter where you are in history.
So whilst fiat currencies are no longer backed or pegged to gold, it is an interesting that many of them still maintain very large reserves of gold. In fact, Central banks are one of the dominant buyers of gold in the investment space.
As an interest study, I was looking through some of the Central bank holdings of gold and importantly, who has been buying, who has been selling. We are starting to hear reports that wait times for Bullion investors are coming up on many months, not weeks as is usual and that volumes have been off the charts of late.
Now there is obviously a lot going on with respect to geopolitics, central banking policy and national interests. I can’t even begin to interpret what this data means, but what I found was certainly noteworthy and very surprising.
If you have any thoughts, let me know on Discord as there is a fascinating conversation to be had.
Who owns all the gold?
The USA owns a whopping 24.5% of all central bank held gold! If my history serves me correctly, the USA was the largest beneficiary of the enormous wealth (gold) transfer from Europe across the Atlantic during WWI and WWII. In fact I read the other day that Britain only finished paying off their WWI debts in 2015…97years after the war ended.
Germany, the IMF, Italy, France, China, Russia, Switzerland and Japan own a combined 50% and the rest of the world owns the remaining nations hold 25%. What was truly amazing was how many western nations own exactly ZERO gold! Canada, New Zealand and Norway are examples who actually own absolutely no gold in their reserves.
We can also look at how much of each central banks foreign reserves are held in gold. I believe this represents the proportion of non-sovereign currency held in gold, i.e. how much of the ‘money’ that is not USD does the USA hold in gold. The chart gets quite small as there is a lot of data but some highlight:, Venezuela holds 81% of foreign reserves in gold, taking #1 spot and USA holds 77.9% in gold (which means that the remaining 22.1% is held in some other basket of assets like GBP or YEN).
Only 13 nations hold more than 50% of foreign reserves in gold, whilst the vast majority hold 10% or less. This does indicate that more and more countries are moving away from gold. Interesting right?
Who is buying and who is selling?
The next question is to look at the flow of gold, where is it changing hands and to what extent. I found data that provides month by month inflows and outflows of central bank gold since 2002 which is a reasonable dataset.
The chart below is a stacked area chart of the total tonnage of gold held by all the worlds central banks. I have marked the start of major market sell offs in red including 2007-08, 2015 and 2018 as well as overlain the gold price.
The thicker the bands, the more volume of gold held. Where the band gets thinner over time, it means the central bank is selling gold, and vice versa, expanding bands mean accumulation over time. More on that later.
What is very interesting is that the general trend was down through to around 2009. At the end of the 08-09 recession, China (grey at bottom) and Russia (yellow in middle) bought a stack of gold. That actually triggered a net uptrend in central bank accumulation. China again bought A LOT of gold in 2015 when a market uncertainty started to creep back in. Russia has been heavily accumulating since 2015.
The next chart shows the physical change in each central banks holdings measured in tonnes. The chart above was total volume held and you will notice that the USA is not shown on the chart below. This means that the USA by and large neither bought or sold, they HODLed their gold.
This paints a very interesting picture.
Net Major Sellers: Switzerland, France, Euro Area (i.e. some of the largest European holders and all in the West)
Net major Buyers: China, Russia, Turkey and Uzbekistan, all East of central Europe.
To me this looks like gold is flowing from west to east. Past gold super powers like the UK and even some of the worlds biggest producers Canada and Australia, hold practically (or literally) no gold. China and Russia have been accumulating at an extraordinary rate, clearly motivated by downturns in global equities markets.
What could this mean
I’m certainly not qualified enough in global geopolitics to answer outside my own speculation. If I was to take a guess, this implies that China and Russia are deliberately accumulating an asset they believe is sound, in a time when fiat currencies are becoming little more than paper.
The west is printing money at a great rate of knots. I suspect China and Russia have been planning for this downturn a lot longer than the West has based on the pattern of their buying. China has also experienced the effect of losing to a sounder money. Historically, China remained on a silver standard whilst the rest of the world went gold and the greater scarcity of gold destroyed their relative economic power for decades.
Perhaps these nations are attempting to drop the USD as the global reserve and instead moving to a semi, pseudo or even full scale gold standard. Maybe it is just a trade on sound money.
If this is true and the East is attempting to undermine the USA and abandoning the USD global reserve currency, what would a future look like where the counter attack was to make gold the new silver?
The prisoners dilemma of bitcoin adoption is real. If it turns out that the shift to a gold standard is in fact destabilizing to the USD… the West would be well advised to switch to a harder, sounder money like BTC. Likely, this would destabilise gold and undermine the decades of very deliberate expenditure on gold in this strategy.
Unfortunately, the allure of printing money is so tempting and so inevitable in our current predicament, that the West is unlikely to make any such a shift and thus the cycle of currency devaluation will continue.
No matter what case or side of the equation we are all on, one thing is becoming increasingly certain. The paradigm of money is now shifting on a global scale. The global reserve currency is almost certainly undergoing a mutiny and is clearly being challenged from all angles. This is a historic event occurring right now, and for the first time, we have the tools, internet and data available to watch it all unfold.
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