Gold The Store of Value

Gold The Store of Value 

The rebuilding of central bank gold reserves since the financial crisis in 2008 marks the latest phase in a two centuries long cycle of changing policies on the yellow metal, which fall into seven distinct periods or ages.

The Seven Ages of Gold have each lasted an average of about 30 years. And the current, Rebuilding period is the longest spell of gold accruals since 1950-65, when central banks and Treasuries acquired a net total of more than 7,000 tonnes during the postwar economic recovery.

Since 2008 central banks have added more than 2,800 tonnes or 9.4 per cent to reserves, equal to annual net purchases of 350 tonnes. This brings purchases in line with the 100-year average up to 1970  reflecting the metal’s renewed attractiveness as a haven asset in an environment of low or negative interest rates.

One reason for gold’s renaissance as a monetary asset has been developing countries hesitancy about relying on reserve holdings in dollars. China, in particular, seems to be using gold to counter the dollar’s weight. Last year China broke a six-year silence to reveal holdings of 1,658 tonnes as of June 2015 against the previously reported figure of 1,054 tonnes. As of this August it had 1,823 tonnes.

Beijing moved to a market valuation of gold worth $70.5bn, although this makes up only 2.3 per cent of total Chinese international reserves. China’s total official gold holdings are judged to be sizeably larger, as metal from local mine production is thought to be held in a domestic account separate from the international gold holdings.

While developing countries have been building reserves, developed countries have been conserving stocks. European central banks signed a five year agreement in 1999, renewed in 2014, pledging a restrictive policy on gold sales until 2019. One reason is that many banks inside the euro area see their gold reserves as a hedge against potential monetary losses from imbalances and tensions affecting the single currency.

The world’s biggest official gold holder is the US, with 8,134 tonnes followed by Germany with 3,378 tonnes, the IMF with 2,814 tonnes, Italy with 2,452 tonnes and France with 2,436 tonnes.

The Seven Ages of Gold started with the Pre Gold Standard before German unification in 1871, which triggered the system in which central banks gold trading at a fixed price in effect regulated the world economy.

Broad international adoption of the gold standard ushered in the second period, from 1871 to 1914, when central banks became guardians of a fixed-price system. That was followed by the War Economy age from 1914-45, spanning the reintroduction of the gold standard, the inter-war depression and the gold standard’s 1930s demise.

Then there was the 1945-73 period the Bretton Woods era of rising gold reserves. During the Demonetization, or fifth period between 1973 and 1998, gold’s role was in limbo after it was officially phased out of the monetary system. In the Sales period that followed from 1998 to 2008, central banks were unloading bullion holdings.

Central bank gold transactions have often been disassociated from the gold price. The current period since 2008 has been one of sharp price swings in the $1,000 to $1,600 per ounce range. But central bank purchases appear to have been a factor behind the post 2015 price recovery.

Based on long-term figures for gold holdings and world production, gold stocks in the hands of official institutions (central banks, treasuries and bodies such as the International Monetary Fund) appear to have steadied at around 17.4 per cent of total above ground stocks. This is down from 23 per cent in 2000 and 40 per cent in 1970, but marks stabilization over the past decade following an earlier period in which central banks were net sellers.

Total gold holdings are now back to early 1950s levels. But there has been a shift in gold distribution from the US Treasury to Europe and, latterly, developing nations. Illustrating this shift, the US accounts for just 25 per cent of total official holdings, compared with 19 per cent in 1900, 33 per cent in 1920, 76 per cent in 1940, 44 per cent in 1960 and 23 per cent in 1980. In future as economic clout moves from advanced economies, developing nations are likely to build up further gold reserves. In the further development of the Ages of Gold, the metal’s monetary renaissance that started in 2008 may have further to run.

With India having one of the largest consumption of gold in terms of investments and store of value, with the present demonetization exercise with the right aim but a complete failure and no cash in circulation the gold prices would take a hit in India in the near and mid term along with the very strong dollar. But then in the long term the age old rational of gold being a store of value where the value may dip but cannot become zero by any move by the local government a lot of investors have recognized gold as a great store of value and slowly move a part of the wealth as a pure story of value.

-Farzan Ghadially