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It is now more obvious than ever that gold is becoming the
new global reserve currency. Continuous and aggressive central-bank actions
from the United States and Europe are driving the demand for gold. Investors
have not yet seen any of the real hyperinflationary pressures that seem likely
down the road.
Gold’s substantial rise in price should speak for itself. In
dollar terms, gold returned 11.1% in the third quarter and was up by 16%
year-to-date through the end of the quarter. The World Gold Council said that
gold has a low stock-market correlation through time. That was not the case in
the third quarter. Gold still outperformed almost all the major equity markets
in the largest gold-holding nations in 2012.
24/7 Wall St. analyzed how the gold rankings compare to each
major nation’s gross domestic product and how those figures compare to the top
10 holders of gold. What is surprising in some cases is how countries with the
largest GDP are not necessarily the largest holders of gold. Two small nations,
the Netherlands and Switzerland, are major holders of gold. Under the terms of
the Central Bank Gold Agreement among major European states, many countries are
supposed to be selling gold but are not.
The United Kingdom’s $2.43 trillion in GDP is the world’s
seventh largest, but its gold holdings of 310.3 tonnes rank only 17th in the
world and account for only 15.9% of its total foreign reserves. Does the old
term “pound sterling” mean that the British banks really care more about
silver? Another standout exception is Brazil, which has tiny gold reserves
compared with its GDP. Its $2.5 trillion in GDP ranks sixth in the world, yet
it holds only 33.6 tonnes of gold, or 0.5% of foreign reserves. Brazil ranks a
surprising 52nd in the world among gold holders.
The International Monetary Fund is the third-largest
official holder of gold, with more than 2,814 tonnes. The European Central Bank
ranks right behind India, with 502.1 tonnes and 32.3% of its total foreign
reserves held in gold. Central bank buying of gold was recently undertaken by
Russia, Turkey, Ukraine and the Kyrgyz Republic. Turkey went as far as raising
the gold reserve requirements for its commercial banks.
The World Gold Council report shows low borrowing costs and
the support of financial markets spur gold accumulation. Gold is no longer just
an inflation hedge; it is the key protection against a global race to devalue
currencies, even if consumer prices are somewhat stable. Bonds pay historically
low rates and stock market volatility has spooked many investors, so gold is
becoming the true safe haven.
Major central banks are growing their balance sheets by
purchasing trillions of dollars in paper assets. The World Gold Council said
that research showed that a 1% change in money supply, six months prior, in the
United States, Europe, India and Turkey tends to increase the price of gold by
0.9%, 0.5%, 0.7% and 0.05%, respectively. The Council also said that inflation
is still several years off and many central banks have been more worried about
deflation. Investors would be well advised to heed a warning from bond king
Bill Gross, who told global investors to have exposure to hard assets, which
will rise in value with inflation.
24/7 Wall St. has listed the 10 nations with the largest
gold reserves, along with the percentage of total foreign reserves held in
gold, each nation’s 2011 GDP and how it ranks in the world, and the local stock
market performance. We have added analysis about how the potential unraveling
of the euro could play into the future buying or selling of gold by European
nations. For nations outside Europe, we have provided some historical context
and predicted the path that their central banks are likely to follow in the years
ahead.
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