As China and Russia Shun US Treasuries for Gold, Why Does the UK Not Follow Suit?

Since the abandonment of the Bretton Woods system, and the UK’s decision to sell vast quantities of gold holdings in 1999 (the incident infamously known as “Brown’s Bottom”), you might think it would be fair to say central banks have turned their backs on gold.

The reality appears to be quite the contrary. The central banks of Russia and China have taken great strides to increase gold holdings in the last decade. In doing so, they have sold much of their holdings in US Treasuries, effectively chunks of the US national debt, in a sign that they seek to diversify their assets.

As this is going on in the background, Judy Shelton, an advocate for a return to the gold standard, is being touted as a possible pick to sit on the Federal Reserve Board. The US had gold holdings of as much as 8,133 tonnes in2019 Q1. That’s 75 per cent of its total foreign exchange reserves.

Dump the Dollar, grab gold

According to the World Gold Council, Russia and China hold 2,168 and 1,885 tonnes of gold respectively. In comparison, the UK’s total gold holdings look markedly smaller, resting at just over 310 tonnes, or just under 8 per cent of foreign exchange reserves, and it hasn’t moved much since the gold sell-off in 1999.

In contrast, Russia has doubled its gold holdings in the last five years alone.

This move by central banks to acquire more and more gold helps support the idea that gold remains a safe haven and a store of wealth. But is there something more going on here? If, as some say, the bull market in gold is truly dead, why are central banks so keen to acquire so much of it?

Perhaps they are expecting significant appreciations in value in the coming years? Or perhaps the world is moving away from a US/UK-centric financial system, in favour of a new orthodoxy that decides the strength of economies based on how much gold they possess? Such a move would benefit those with even a little bit of gold.

The US relationship with gold

The US has had a chequered relationship with gold over the course of its history. The Bretton Woods system has been long been consigned to the history books – it was an era in which the Dollar was fixed to gold, at a rate of $35 per troy ounce.

The behaviour of the US and the UK, in dealing with the aftermath of the global financial crisis, has been greatly supportive of gold. Their respective central banks have printed millions of Pounds and Dollars, in a bid to inflate the economy.

Judy Shelton, a potential pick to join the US Federal Reserve, has been a long-term advocate for a return to some form of gold standard. Ms Shelton is an open critic of the Federal Reserve’s way of doing business, likening it to the Soviet Union-era agency, Gosplan, which the USSR used to run its economy.

Even the speculation of someone being potentially considered to join the Federal Reserve with known advocacy for a return to some form of gold standard reflects some kind of acceptance that the attitude of printing fiat currency without limits might be exhausted as a viable economic model.

Gold as a measure of stress

A new gold standard would be a major disruption to the economic established order in 2019, and as it was in its original iteration, it would put gold front and centre, when it comes to economic dominance. Gold serves as a useful measure of stress in an economy and Britain has a large amount of that at present.

The Pound remains vulnerable, as Brexit remains unresolved, making gold a useful safe haven for those wishing to preserve their wealth through tangible assets.

Britain’s current economic and political difficulties suggest that investors may wish to seek assets that will weather the storm. Recent price action backs this assertion – the price of gold in Pound Sterling remains above £1,000 per troy ounce as of mid-June 2019. This is a price level at which it has managed to remain close to since the price of gold hit its last Pound Sterling peak in 2011.

The Bank of England seemingly doesn’t see the value in acquiring much gold in the here and now, compared to other central banks, despite the price remaining close to its highest valuation for decades.

Time for gold to shine?

The possibility of a new gold standard, however remote that might be, would have a profound implication for British economic prowess. If the prestige of a sovereign nation were to depend upon the amount of gold an economy possesses, rather than the number of Pounds or Dollars its central banks can print ad infinitum, Britain might have to rethink how it chooses to handle the yellow metal.

Even if a new gold standard is highly unlikely, at least in the short-term, economic stresses in Britain persist and we may see the absence of a clear resolution to Brexit until the autumn. Gold has demonstrated an ability to not only retain but to gain value, especially in times of economic or political instability.

In the aftermath of the EU referendum, gold spiked, putting it more than 50 per cent higher in value on an annual basis, when priced in Sterling. This reflects gold’s potential to make sudden gains within a short space of time, especially during what could quite possibly become one of the most consequential summers in British history.

You might consider now to be an ideal time to buy gold as a means to ensure you have got some of your wealth preserved in the form of a tangible asset that has stood the test of time over many centuries.

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