Are Central Banks About to Open The Floodgates For Gold and Cryptocurrency?


by Alex Deluce, The Gold Telegraph:

Recently Switzerland’s Central Bank Swiss National Bank garnered headline glory by reporting a record $55 billion (54 billion francs) profit last year, which exceeds even the annual profit of Apple and the combined profit of JP Morgan and Berkshire Hathaway. The central bank’s strong result was aided by record profit on its equity holdings, bond prices, and its weaker currency.

SNB earned 8% of GDP last year

SNB’s stupendous results made one wonder how the central bank emerged as a major money manager with a nearly $800 billion portfolio of bonds and stocks. Of note, unlike other central banks such as ECB, BOJ and FED, SNB’s balance sheet largely comprised of foreign assets, with 49 billion francs of its profits generated from its foreign assets, while the central bank could net only about three billion francs from its gold holdings and another two billion francs from its Swiss franc positions. It is widely believed that SNB has been preventing Swiss franc from drastic appreciation by printing more francs and infusing them into global markets to buy bonds and stocks. The hefty profit of 54 billion francs clocked last year translates into 8% of Switzerland’s GDP. Thus one can surmise that the central bank made substantial PROFIT OUT OF THIN AIR.

While SNB’s gold holdings resulted in only about three billion francs of profit last year, various central banks turned out to be aggressive buyers of gold in 2017, having purchased 414.9 tons, as against 95.1 tons bought in 2016. Investors were in full focus when data from World Gold Council revealed that the central banks purchased 117.7 tons during October and November 2017 alone. It is well known that central banks prefer gold as protection against black swan economic events.

Welcome to Digital Gold

Amidst central banks’ active reserve management skills, as elucidated above, a former central banker with the South African Reserve Bank believe in 2018, G7 central banks will start buying cryptocurrencies to propel their foreign reserves. Considering the recent popularity and upsurge witnessed in prices of cryptocurrencies, the former central banker predicts the special drawing rights and G7 country currencies will be forced to alter their foreign reserve weightages by ultimately including a basket of cryptocurrencies.

Considering bitcoin was designed to enact as digital gold, he reckons G7 central banks will witness bitcoin and other cryptocurrencies turning out to be biggest international currency by market capitalization. It is felt that such massive popularity of cryptocurrencies can force central banks to call for emergency meetings to exercise their prerogative to deviate from the existing investment policy for reserve management and hence ultimately central bank money could pour into cryptocurrencies.

Centralized Vs Decentralized digital currencies

Resonating the vast popularity of cryptocurrencies, it has been reported that Russia is working on a government-run cryptocurrency, while other leading countries including the US, China, Japan and Canada are either exploring or actively working on some form of digital currency. Similarly, central banks from Singapore to Sweden have been pondering the feasibility of issuing digital versions of their own money. It is felt digital currencies could cut out middlemen and banks.

Alluding to the rapidly evolving area of central banks’ interest in digital currencies, Bank for International Settlement has come out with a report this month titled: “Central bank digital currencies”. The report published by BIS’ two committees viz.: Committee on Payments and Market Infrastructures and Markets Committee suggests central banks should carefully consider the implications for financial stability and monetary policy of issuing digital currencies.

Terming Central bank digital currencies (CBDC) as a potentially new form of digital central bank money, the BIS report underscores two main CBDC variants viz.: a wholesale (for use in financial market) and a general purpose (for use by the general public).

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