Commentary: Why some countries rushed to buy gold before coronavirus crash

Commentary: Why some countries rushed to buy gold before coronavirus crash

Countries have been buying gold and repatriating it from overseas storage to an extent never seen in modern times, says an observer.

FILE PHOTO - Gold bars are seen at the Austrian Gold and Silver Separating Plant 'Oegussa&apos
File photo of gold bars seen at a gold and silver separating plant. (Photo: REUTERS/Leonhard Foeger/File Photo)

SHEFFIELD, England: The global economy was flashing danger signs long before the pandemic.

For one thing, many countries were clamouring to get hold of as much gold as possible. For the past decade, they have been buying new reserves and bringing it home from overseas storage to an extent never seen in modern times.

Then just before the pandemic, there was a pause. What does all this mean?

READ: Asia shares make cautious gains, oil and gold jump

READ: Commentary: Investors will soon struggle to find assets to put their cash in

THE RUSH FOR GOLD

Central banks added 650 tonnes to their reserves in 2019, the second highest shift in 50 years, after the 656 tonnes added in 2018.

Before the 2007 to 2009 financial crisis, central banks were net sellers of gold worldwide for decades. Leading the recent spree has been China, Russia, Turkey, Kazakhstan and Uzbekistan.

We have also seen a large effort by central banks to repatriate their gold from other countries, mostly from storage in New York and London.

con gold
(Graphic: Drew Woodhouse)

Venezuela started repatriating its gold in 2011, shipping 160 tonnes from New York. A third of its holdings remain in London, but only because the Bank of England won’t repatriate them – declaring it doesn’t recognise the government in Caracas. Venezuela has now made this the subject of a legal claim.

Between 2012 and 2017, Germany repatriated most of its massive reserve from Paris and New York to Frankfurt. The Netherlands did likewise in 2014, followed by Austria.

con gold 2
(Graphic: Drew Woodhouse)

READ: Commentary: Multibillion-dollar wizards – how COVID-19 is exposing what’s behind the curtain

Then came Eastern Europe. In 2018, Hungary announced it would repatriate nearly 3 tonnes of gold from London, while greatly boosting its reserves. Poland repatriated 100 tonnes from London a year later, about half of its national reserve.

Next was Romania, while Slovakia and Serbia have been considering moving gold home from England too.

WHY THIS IS HAPPENING

This dash to gold is about geopolitics and economics. Gold serves as a patch mark of nationalist identity. To quote Adam Glapinski, governor of the National Bank of Poland, “gold symbolises the strength of a country”.

Stocking up has made sense to many countries in the populist climate. It is also a sign of countries diversifying from dollars.

The likes of Russia, China and even countries in Western Europe want to break the US dominance of the financial system, having seen it used as leverage in everything from economic sanctions to trade threats.

READ: Commentary: Embattled China knows its national priority is the economy

READ: Commentary: The US dollar's supremacy is waning. So will America’s influence

Following the last financial crisis, many also feared there was more to come. When former Slovak Prime Minister Robert Fico last year urged his parliament to compel the central bank to repatriate gold from London, he argued that overseas reserves could be at risk in a new global economic crisis.

Citing the 1938 Munich pact between France, Britain, Italy and Germany that allowed the German invasion of Czechoslovakia, he said that “sometimes your international partners can betray you”.

Countries also seem unnerved by the row over Venezuela’s gold, plus the fact that Germany’s repatriated bars from the US appeared different to what it thought was in store. This suggested the Federal Reserve was trading them.

FIAT VS GOLD

In an era where everything is digital, fast and smart, it might sound strange that a static piece of metal could still have a major monetary role.

President Richard Nixon seated at his desk in the White House Oval Office
FILE PHOTO: U.S. President Richard Nixon seated at his desk, with family photos and the Lincoln bust statuette visible behind him, in the White House Oval Office in Washington, U.S. on June 23, 1972. Courtesy The Nixon Library and Museum/Handout via REUTERS

Central banks abandoned the gold standard in the 1970s, led by US President Richard Nixon, which meant that paper currencies were no longer exchangeable for gold. This was necessary because there were too many dollars in the international system and too many countries exercising their right to exchange them for US gold reserves.

After Nixon’s decision, currencies became fiat, meaning that countries could freely decide how much to have in circulation. Currencies now had value not because they were backed by gold, but because the state standing behind them said they had value.

Central banks effectively declared gold to be a relic. Fiat money was seen as superior, thanks to central bankers’ supposedly scientific oversight of monetary policy.

READ: Commentary: It is time central banks and governments shoot for negative interest rates

The new dash for gold makes economists pause and wonder what is happening. It seems to show many countries looking for a safe haven in these years in which interest rates have been very low and central banks have been printing large amounts of money to stimulate the global economy.

Gold continues to have intrinsic value, so it reassures countries – especially if they fear inflation and downturns.

And yet, just as economic uncertainty was about to move to a whole new level with the pandemic, this trend lost momentum.

Additions to the gold holdings of central banks and other international institutions in the three months to January 2020 – the most recent figure available – were just 67 metric tonnes, the least since August 2018.

READ: Commentary: Why Singapore's private residential market will remain attractive in the long term

READ: Commentary: How Singapore will remain a top trading hub in a post-pandemic world

In truth, this was not entirely surprising. Purchasing bullion at close to a seven-year high, and after a month of prices fluctuating plus or minus about 13 per cent, is no particularly prudent way to consolidate economic and geopolitical power.

It will be a few months before we see how the pandemic has affected central banks’ attitude to gold. It could yet convince them that gold will still move higher.

So don’t be surprised if this dash to gold has resumed in recent weeks – in a leading indicator of troubling times ahead.

BOOKMARK THIS: Our comprehensive coverage of the coronavirus outbreak and its developments

Download our app or subscribe to our Telegram channel for the latest updates on the coronavirus outbreak: https://cna.asia/telegram

Drew Woodhouse is Lecturer in Economics at Sheffield Hallam University. This commentary first appeared on The Conversation.

Source: CNA/el

Bookmark