Dan Popescu is a Member of the Goldbroker.com Editorial Team

 

Gold and Geopolitics

 

 

or-geopolitique

 

“Gold is the sovereign of all sovereigns”

Democritus

 

They say that gold is a geopolitical metal. Gold is real money with no counterparty risk and, furthermore, an excellent wealth preserver in time and space. Like fiat currencies (dollar, euro, yen, Yuan etc.), gold’s price is also influenced by political events, especially those having an international impact. Alan Greenspan, ex-chairman of the Federal Reserve, said that gold is money “in extremis”. This is why gold is part of most central banks’ reserves. It is the only reserve that is not debt and that cannot be devalued by inflation, contrary to fiat currencies.

Observe in chart #1 that central banks own 30,500 tonnes of gold, or 19% of above ground gold. However, this number is an underestimation, because several countries (e.g. China, Saudi Arabia) report only a portion or none at all of their gold holdings. In addition, if they do, they do not do it in a timely manner.

 

 

stock-mondial-orChart #1: Global stock of gold – click to enlarge.

 

I think that the official amount of gold held by some countries (through different institutions) is rather close to 40,000 tonnes. Even if this gold represents only 20% to 25% of the total gold stock, it can be quickly brought to market and in sufficient quantities to have an impact on the market price. The annual gold market is only 4,477 tonnes per year; it is thus easy for United States or the European Union to influence gold’s price, since they own respectively 8,333 and 10,779 tonnes of gold.

Currencies mirror the health of the countries issuing them. When a country manages its economy well and offers a good social and political environment, demand for its currency increases and, thus, it appreciates, whereas the opposite happens when the economy and politics of the country are poorly managed. The fiat currency is the image of the country and its value only depends on the trust people have in its economy. When the international monetary system is on the brink of collapse because of an exorbitant global debt, there is a flux taking place toward real assets (land, buildings, jewelry, gold, silver etc.). Gold is real money, contrary to the different countries’ currencies, which are fiat money and can be devalued by monetization of the debt.

Since the beginning of history, gold has taken center stage in geopolitics. History tells us that the Roman Empire invaded Dacia (Romania today) at the start of the 2nd century B.C. to take control of the rich gold mines of the Carpathians. The Empire had depleted all of its gold mines and its expenses were growing rapidly. The roman economy was based on war and those wars were costing more and more gold while they would bring in less and less. By that time, the Romans had taken a liking for luxury items that they did not produce themselves, like fine silk from China, pearls from the Persian Gulf, perfumes from India, ivory from Africa, etc. Roman gold was being used for those purchases and a lot of it was needed.

Later, in the 1500s, the quest for gold became the objective of the conquest of the Americas after the return of Christopher Columbus who had discovered the Aztec and Inca gold. During the Second World War, Hitler put together a team with the mission of getting hold of the gold and other treasures of the conquered nations. Nazi Germany used all of its available resources to win the war, and gold was an important weapon in Hitler’s economic arsenal (gold stolen from occupied countries’ central banks between 1939 and 1942). It is interesting to note that private ownership of gold was forbidden, by left or right leaders, totalitarian or democrats, from Lenin in Russia, Hitler in Germany, Mussolini in Italy, Mao in China to Roosevelt in the United States.

In 1944, at the Bretton Woods Conference, the United States took advantage of the great weakness of world after the Second War and imposed a monetary system based on the dollar, but backed by gold. Following a crisis opposing the United States and Europe, but mainly France, gold backing of the dollar was abandoned in 1971. Deficits and debts brought about by less productivity and some costly wars (Korea, Vietnam) started to weigh heavily on the dollar. The US dollar has become, since 1971, the international monetary standard, without any gold backing. However, gold has remained the “de facto” standard lurking in the shadows, should a major monetary crisis occur, watching for the first mistake to regain its center role. Many countries, like Canada, sold all their gold in the 90’s but, in general, the official holdings, as can be seen in chart #1, have barely diminished.

A new era started in the 90’s with the end of the Cold War and, thus, the beginning of a world disarmament. An era of peace and prosperity seemed to have started under the almost absolute dominance of the United States. During this optimistic period, gold fell from $850 to $250 an ounce. This period was short lived, because the September 11 terrorist attack in New York, the war in Afghanistan, the invasion of Iraq, the 2008 financial crisis and, recently, the annexation of Crimea by Russia have changed all that.

During the 2008 crisis – that almost succeeded in bringing down the current international monetary system – gold made a stunning comeback into the system. During the crisis, gold became the only accepted guarantee in order to get liquidity. What was significant was that after having been ignored for decades, gold was coming back into the international monetary system via settlements of the Bank for International Settlements (BIS). These transactions themselves confirm that gold was coming back into the system. They revealed the poor state of the financial system before the crisis and showed how gold has indirectly been mobilized to support the commercial banks. Gold’s old emergency usefulness has resurfaced, albeit behind closed doors at BIS in Basel, Switzerland.

Starting in 2008, we can also observe that western central banks stopped selling gold and that emerging countries’ central banks accelerated their gold buying. The extreme indebtedness of Western countries coupled with a rebirth of the emerging markets economies have destabilized even more an international monetary system based on an already much weakened US dollar.

 

reserves-or-globales-production-miniere-globale

Chart #2: Global Gold Reserves vs Global Gold Production – click to enlarge.

 

To read the rest and see the remaining charts, click here

 

Charts by: Thompson Reuters/GFMS, sharelynx

 

 

 

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3 Responses to “Gold and Geopolitics”

  • No6:

    Silver should be the preferred monetary metal simply because it is not held by central banks.

  • JE Stater:

    I am impressed by the total production chart. 17x in 160 years, that’s a CAGR of 1,4% (only) but still it does inflate. It is reasonable to assume it inflates not above real economic growth, so it preserves real purchasing power.

  • Kreditanstalt:

    What is this trying to say?

    The writer doesn’t address whether central banks actually HAVE much free, unencumbered gold left. Even if they do, this article provides no rationale as to why or whether central banks would want to “sell” their gold.

    And any analysis premised on “gold production” verges on meaninglessness: it’s ALL “for sale” at some, probably much higher, fiat currency price…

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