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Gold vs. Central Banks

blog | Published On 6/17/2016 3:19:35 PM by Everett Millman
Vault at the New York Fed Vault at the New York Fed

Perhaps the worst-kept secret in the banking industry, particularly with central banks, is that they are adamantly opposed to gold as a financial asset. Forget for a moment that these same central banks hold some of the world's largest stockpiles of the metal; at every turn, they attempt to discredit the utility that gold can offer investors in order to push more worthless paper currency on the public.

You see, gold is incorruptible. It cannot simply be debased or printed from a machine—or, increasingly, altered on a computer screen. It is a scarce commodity that can universally be exchanged—in other words, fungibility, an important requirement for any form of money. This is an enormous thorn in the side of central bankers in their quest to confiscate the world's privately held wealth.

Source: Daily Paul Source: Daily Paul

In one infamous exchange, Texas Representative Ron Paul (R) pressed Federal Reserve Chairman Ben Bernanke for a reason why central banks hold gold as a key reserve asset if it's so unimportant. Bernanke drily responded, "Because it's a tradition." This woefully insufficient explanation is just one such instance that reveals the duplicitous bias that policymakers in charge of our country's money harbor against gold.

Even Switzerland

One institution that generally stands out for its wise belief in the power of gold is the Swiss National Bank (SNB), the country's central bank. The Swiss franc has stood as one of the world's traditional safe havens thanks to its historical link to gold; up until the euro was introduced at the turn of the millennium, 40% of the currency's value was backed by gold. Although this connection has been broken, the SNB continues to be among the world's leading hoarders of gold, holding well over 1,000 metric tonnes of the yellow metal. This gold no doubt underpins the strength of the Swiss franc (CHF) even today.

However, like its counterparts in the eurozone and Japan, the Swiss central bank cut its benchmark interest rate into negative territory. This extreme move was intended to prevent the franc from appreciating too much against the plummeting euro, which would take a bite out of Switzerland's export-dependent economy.

30-yr Swiss bond yield over 1 year. Source: MarketWatch

Now, as the chart above shows, even the yield on 30-year Swiss debt has slipped into the negative. While the situation is much the same in other major economies like Germany and Japan, this unprecedented environment of subzero interest rates and yields for even the world's most trusted sovereign debt is a stark example of the inability of central banks to manage steady economic growth.

Possible Remedy

Gold-and-Silver-BarsWith investors scrambling for a safe haven from market turmoil, buying debt with a negative yield (essentially, paying the bank to hold your money!) seems a nonsensical notion. It is estimated that some $10 trillion in government bonds are paying negative yields. Under such conditions, the fact that gold offers zero yield (unless you lease it out as a financial instrument, which is another matter entirely) is actually more attractive than a negative yield.

Considering history has shown that gold is a stable store of wealth even before the appearance of negative interest rates, the current environment makes the need for precious metals even more pressing. As precious metals analyst Dan Popescu for GoldBroker.com suggests, you can "be your own central bank" and buy gold, wise words once suggested by renowned alternative investor Marc Faber.

 

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.

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