Gold’s Breakout: It’s Not the Inflation

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by Jim Rickards, Daily Reckoning:

Most assets have a poor record over the past year. Gold is one of the few assets that posted a gain — not a major gain, but a gain.

Gold has really taken off since late October, from below $1,630 to almost $1,930 today. That’s a major move. What’s going on?

You might want to argue that it has to do with inflation. The trouble with that argument is that (official) inflation has been coming down for the past few months. Meanwhile, gold seemed to massively underperform with respect to the very serious inflation we saw earlier last year.

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So again, why are we seeing a gold spike now? The most likely answer lies with central banks and geopolitics.

Central banks as a whole, led by Russia and China, purchased 399 metric tonnes of gold in the third quarter of 2022. (Fourth-quarter data are not yet available.)

That’s the most gold ever purchased by central banks in a single calendar quarter. It represents over 1% of all the gold held by all central banks combined.

If that pace continues or increases, it would amount to an increase of over 4% per year in central bank gold reserves.

Gold in China’s SAFE

Let’s take a look at China. China’s State Administration of Foreign Exchange (SAFE) announced on Jan. 7 that China had added 30 metric tonnes to its official gold reserves in December 2022. This announcement came on top of a prior announcement that China added 32 metric tonnes in November. That’s a 62 metric tonne increase in just the past few months.

This announcement is significant not only because of the size of those increases, but because this is the first time China has announced increases in its official gold reserves since September 2019 — over three years ago. Why now?

The first thing to grasp is that China did not simply buy that much gold in the market over the past two months and then report it in a timely way. China had the gold all along. They just held it off the books inside SAFE.

This announcement was simply a policy decision to make some accounting entries to allow the gold to appear on the books instead of off the books. There is no doubt that China has at least 1,000 metric tonnes of gold held off the books in this manner, perhaps much more.

So the question investors need to ask is not where did China get the gold (they had it all along), but why did China decide to go public with an increase in their holdings at this time? As with everything in China, the real reasons are hidden and the public announcements are mostly lies.

Still, we can use inferential methods to get at what the Chinese are up to.

The Dollar: Victim of Its Own Success

This gold announcement comes at a time when there is a growing dollar shortage in China and around the world. The Chinese may simply want to bolster confidence in their reserve position.

Then there’s the geopolitics of it. There’s a growing movement to move away from dollar reserves because the U.S. has abused financial sanctions to freeze assets including central bank reserves of Russia, Syria, Iran, North Korea, Venezuela and others.

They’re working to reduce dollar reserves and invent new forms of currency for international payments. That’s why countries like China, Brazil and India are moving away from dollars for fear that they will be next on the sanctions list.

In that context, Bloomberg recently reported about a recent meeting of Southeast Asian officials and experts hosted by a think tank in Singapore. The report revealed that participants were just as fearful as the major countries that the U.S. has gone too far in weaponizing the dollar to apply pressure in geopolitical disputes.

George Yeo, the former foreign minister of Singapore, went so far as to say that “the U.S. dollar is a hex on all of us.” He went on to say, “If you weaponize the international financial system, alternatives will grow to replace it.”

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