Up until the second half of the 20th century, the most important factor that determined the strength of a country’s monetary system was how much precious metal it could stockpile in the form of gold reserves. To some economists, this regime was decried as simplistic, inflexible—even “barbarous.” Nonetheless, such a system that relied upon a gold standard worked remarkably well in terms of maintaining order and stability across the international landscape.
Now, in the face of unprecedented uncertainty and economic fragility, nations are once again building up their gold reserves in order to insulate themselves from another potential global financial meltdown.
It’s not a fluke that the greatest period of economic growth in human history (i.e. the postwar years that followed WWII) occurred under a de facto gold standard known as the Bretton Woods system. One of the clear-cut reasons that the U.S. economy thrived during this period—aside from a giant labor pool, vast natural resources, and a culture of innovation and an entrepreneurial spirit—was because it held virtually all of the world’s gold when the dust settled. This strategic gold was the bedrock that made the dollar the world’s reserve currency. Likewise, it’s no accident that economic stagnation has been the norm ever since this arrangement was abandoned by President Nixon is the early 1970s.
When a country’s money supply is not backed up by anything other than fiat (government decree), the public confidence and purchasing power of that currency erodes over time. This has been proven repeatedly throughout human history with a 100% rate of success (or failure, depending on how you look at it).
It’s not particularly surprising, given this context, that both China and Russia have been aggressively growing their national gold reserves over the past decade.
In addition to diversifying away from the U.S. dollar, this trend is widely seen as a means of boosting confidence in the national currencies of these countries. China has made it clear that it wants the yuan to be a global currency; a sizeable pile of gold standing behind the yuan goes a long way toward engendering international confidence in the yuan. Similarly, there have been some rumors that Russia’s massive expansion of its gold reserves serves the same purpose of setting the stage for a gold-backed ruble someday.
A related trend has been the tendency for governments around the world to request that their gold reserves held in vaults in New York and London be returned. This process is known as repatriation. Perhaps the most prominent of these repatriation campaigns came from Germany, which had been storing more than two-thirds of its 1,500 tonnes of gold overseas.
Far from the only nation with such concerns about where it’s gold was being held, Germany was joined by the Netherlands, Austria, and France in demanding hundreds of metric tonnes of the yellow metal return to its shores. To a lesser extent, this strategy was emulated by Australia, Azerbaijan, Belgium, Ecuador, Italy, Mexico, Poland, and Romania.
As market research by the Goldmen Group suggests, this quest to once again establish large gold reserves is hardly a radical new idea. In fact, you could say that these countries are simply copying the model laid out by the U.S. To this day, the U.S. holds far and away the largest amount of gold in the world with over 8,000 tonnes—though there is some debate as to whether or not all of this gold has been hypothecated or leased out. If indeed all of the gold once stored at Fort Knox has been replaced by worthless IOUs, the United States is in for a rude awakening.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.