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My estimate of the world’s official gold reserves was 38,764 tons in the second quarter of 2023, breaking the previous record set in 1965. The new high confirms that the world has entered a new era of gold. Central banks will continue to accumulate gold and the metal’s role in the international monetary system will increase at the expense of the US dollar.
Analysts often use the International Monetary Fund’s (IMF) calculation for total official gold holdings, but what is often overlooked is that this figure is an estimate by the fund. As mentioned in my previous article about China’s official gold reserves, not every central bank is transparent about their gold holdings. The Chinese Central Bank (PBoC) says it has 2,113 tons. While it’s an open secret in the gold industry, the PBoC owns much more than that – about 5,000 tons, according to my analysis. Another example: the Syrian central bank stopped reporting its gold holdings in 2011. To calculate global gold stocks, the IMF uses the last known data point and assumes that Syria still has 26 tons of gold.
My personal assessment of the world’s official gold reserves is based largely on the way the IMF compiles its world series. The main difference is the “unreported purchases” tracked by industry insiders that I include in my data. My approach:
- The basis consists of the most recently registered volumes of all central banks and monetary authorities, including those that stopped reporting years ago.
- For China I use my own figures from 1995.
- Unreported purchases by central banks other than the PBoC are added, measured as the difference between the World Gold Council’s estimated total purchases based on field research and the reported changes of all central banks combined.
- Known sovereign wealth fund reserves are included*.
- There is also gold, which is owned by international financial institutions such as the European Central Bank and the West African Economic and Monetary Union.
- Swaps on the balance sheets of the Turkish Central Bank and the Bank for International Settlements (BIS) are deducted.
Based on my methodology, global official gold stocks reached 38,764 tons in June 2023, which is about 400 tons more than the previous peak in 1965 of 38,347 tons.
Diagram 1.
The new record reflects the desire of central banks around the world to move away from the US dollar with its increasingly obvious counterparty risks. The turning point in central banks’ gold holdings came shortly after the great financial crisis of 2008, and they have bought more than 7,000 tonnes since then.
The value of world gold reserves increased by 66% from that point, while foreign exchange reserves increased by 30%. As a result, gold’s share of global international reserves (gold and foreign exchange) is rising from an all-time low in 2015.
Diagram 2.
If gold’s share of total reserves (currently 17%) ever gets close to its long-term average (58%), there is plenty of upside potential for gold prices. In a previous article, I speculated that gold could reach $8,000 in the next decade.
Against a backdrop of rising geopolitical tensions, an armed dollar and sky-high debt levels around the world (historically tempered by inflation), central banks will continue to buy gold for the foreseeable future.
The new record for gold reserves is usually a symbolic milestone. All of the trends I describe were not changed by the new high, but rather confirmed.
Foreign central banks predominantly own US government bonds (Treasuries) as dollar assets. As their gold reserves rise, their nominal holdings of government bonds have remained about the same over the past decade. While U.S. national debt increases massively every year, the share of foreign central banks that own this debt is steadily decreasing. This dynamic could lead to a funding crisis in the US and further weaken the dollar’s appeal as a reserve currency.
Diagram 3.
*It is not known exactly how the IMF calculates its world series, but my guess is that gold held by sovereign wealth funds is not included. My figures include about 100 tons for such funds.
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Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.
Source : seekingalpha.com