The instruction manual for surviving a zombie apocalypse is pretty straightforward. Once you’ve kitted out your bunker with canned goods and firearms, get a supply of bullion. You’ll need it to buy bullets and bribe your way out of a death fight in Thunderdome.
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That’s a line of thinking you might associate with cranky gold bugs, but it’s not a million miles away from the rationale behind fund flows in the precious metals market right now — and nations are in the driving seat. Central banks bought 400 metric tons of gold in the September quarter, the World Gold Council reported this week. That’s a record inflow on a par with what they’d purchase over a whole year in normal times.
In the notoriously opaque world of government gold trading, it’s not always immediately clear who the biggest buyers are. Monetary authorities are such big players that they can distort the entire market by showing their hands, one reason that prices plummeted in the 1990s and 2000s when some of the European central banks sold in unison.
There is one obvious factor in common between the declared buyers, however: All are from nations facing serious problems. Turkey, whose lira slumped 52% over the year through September, added 95.5 tons to its gold holdings in the same period. Egypt bought 44.8 tons while its pound fell by 20%. India’s 40.5-ton purchase was matched by an 8.7% weakening of the rupee. Iraq’s dinar is fixed against the dollar, but credit-default swaps protecting against non-payment of its debts surged to nearly 9% in September, even after it bought 33.9 tons of the metal.
That’s a curious situation. Stacking up bullion in the central bank’s vault has long been a powerful signal to investors that a government is going to be a prudent and reliable borrower. No amount of gold buying, though, is going to convince anyone that the fiscally incontinent Egyptian government is a good credit. US 10-year Treasuries, currently yielding 4.2%, also look a much better proposition than a metal that pays no interest, especially now that gold is no longer outperforming the total returns on government debt.
Bullion does have one crucial advantage: unlike bonds, it doesn’t bind you into a relationship with an unreliable counterparty. US government debt was at one time the hardest form of currency, a true risk-free investment. Then, in February, coordinated sanctions on Russia’s central bank vaporized most of the $498 billion in reserves sitting on its balance sheet. The European Union is now looking at using those funds to pay for the rebuilding of Ukraine, Bloomberg News reported last week. In a world where you can trust no one, it makes sense to bulletproof yourself with metal.
Looked at through that lens, the purchases by Turkey and Egypt come into focus. Though both nations are key US allies, they’ve seen relations deteriorate substantially over the past decade as their governments have found themselves more simpatico with rising authoritarian powers. The path ahead for international relations is more uncertain now than it has been in decades. It makes sense in that world for central bank reserves not to be too heavily committed to ties with any one country.
Read the full article here by David Fickling, Advisor Perspectives.
