Over the past 10 years or so, we’ve seen gold demand surge from central banks. It’s a surprising turn, after 40+ years of net gold sales from central banks, following the end of US dollar gold convertibility in 1971.
Net central bank gold holdings fell for most developed markets through the 2000s…
And while it’s been a relatively recent development that most central banks have been buying substantial amounts of gold, there’s one glaring exception:
China.
China has been stockpiling gold for decades at this point, and now has nearly 50% of its central bank reserves held in gold…
Today, that trend continues.
The U.S. trade deficit is notoriously imbalanced, but it’s been shrinking of late, thanks mostly to US gold exports – mostly to China.
The long-time worst-case scenario from goldbug conspiracy theorists (aka people who were mostly correct) was that the U.S. Federal Government was draining its gold holdings from Ft. Knox, and selling it off to foreigners.
Today we don’t have to speculate.
The U.S. is one of the world’s largest gold exporters – and perhaps more notably, gold has become our largest export.
I’m not saying that the U.S. government is selling Ft. Knox gold. I am saying that we’re seeing a lot of gold leaving the country, and at the same time, we’re seeing China convert more of its dollars into gold, instead of Treasury bonds.
It is also true that the U.S. is a large importer of gold. But on net, we’re now exporting much more than we import.
What are we getting for our gold? We’re getting our own dollars back, recycled from our trading partners’ excess dollar reserves that they are forced to hold thanks to our trade deficits.
Not a bad deal for our trade partners, if you think about it: they sell us stuff, we give them dollars, they give us our dollars back, and get our gold.
If this trend continues, they’ll eventually have all of our gold – at which time, you have to wonder why they’d want to continue taking our dollars?
The definition of wealth isn’t “having lots of currency units.”
The definition of wealth is having lots of things that your currency units can buy.
If excess dollars held by our foreign trading partners can’t buy gold… then what’s left? Levis? Nope. They’re made overseas these days. Teslas? Some military equipment?
What do you think happens to the price of gold in dollars as our nation’s gold holdings continue to fall?
More dollars, chasing less gold… It’s always a recipe for higher prices.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio