The Golden Rule Is Real
James Rickards, a financial commentator, has discussed the significance of gold in the global economy. Gold, once a fundamental form of currency, continues to hold a significant place in the world's financial systems despite the breakdown of its backing in 1971. Central banks and finance ministries globally still hold over 37,000 metric tonnes of gold in reserve.
The Importance of Gold in the Monetary System
The reason for this continued reliance on gold is its central role in global monetary systems. Governments, however, are reluctant to admit this because it would expose the shortage of gold relative to banknotes.
Currently, central banks are buying gold as quickly as they can. The dollar price of gold today is $2,754 per ounce, a 69% gain in under two years from its price of $1,630 on Nov. 3, 2022. The dollar price of gold has effectively doubled in just over five years.
Understanding the Math Behind the Price Moves
Investors often focus on the dollar price of gold and analyze the price in round numbers. However, it is crucial to understand that each $100 gain is easier than the one before because each gain is measured in constant $100 increments, but the measurement begins from a higher base.
For instance, a price increase from $2,500 to $2,600 per ounce is a 4% gain. But a price increase from $2,900 to $3,000 per ounce, which is the same $100 gain, is a 3.5% gain. This dynamic becomes even more dramatic with $1,000 price increases.
The Future of Gold
The last time gold was taken seriously as a monetary asset was in the mid-1970s, and the last time retail investors showed significant interest in gold investing was in the early 1980s. Despite two bull markets and two bear markets, gold investing has never captured the popular imagination like housing in the early 2000s or stocks today.
However, this is about to change radically. Central banks have shown a significant interest in gold, with their holdings surging from 33,000 metric tonnes to over 37,000 metric tonnes, a 12.0% gain measured by weight. This increase has been heavily concentrated in two countries — Russia and China.
The Role of Central Banks in Gold's Surge
Central banks' net buying is equivalent to about 20% of annual gold mining output. This doesn't indicate a gold shortage, but it does put a firm floor under the dollar price of gold, creating an asymmetric trade.
The BRICS (Brazil, Russia, India, China, and South Africa) recently announced a new blockchain-based digital ledger to record trade payments using existing currencies of the BRICS members. This system, tentatively named "BRICS Clear," involves no dollars and is relatively safe from U.S. and EU sanctions.
The BRICS Clear system can work well, but it leaves two issues unresolved compared to a single currency system: stability in exchange rates while balances are left unsettled, and the overaccumulation of a certain currency by one party that may have limited use for that currency.
The Implications of the BRICS Clear System
The implications of this system have not yet sunk into market pricing. It's tantamount to an informal gold standard without fixed exchange rates. It relies on market forces and does not rely on huge hoards of freely convertible gold in central banks.
Gold is on an upward path driven by central bank buying. It is poised to go much higher because the BRICS will use physical gold as their anchor instead of U.S. dollars.
Bottom Line
The role of gold in the global economy is undeniable. With central banks buying gold and the BRICS using it as an anchor in their new payment system, gold is set to become even more valuable. What are your thoughts on this development? Share this article with your friends and sign up for the Daily Briefing, which is everyday at 6pm.
The Golden Rule Is Real
James Rickards, a financial commentator, has discussed the significance of gold in the global economy. Gold, once a fundamental form of currency, continues to hold a significant place in the world's financial systems despite the breakdown of its backing in 1971. Central banks and finance ministries globally still hold over 37,000 metric tonnes of gold in reserve.
The Importance of Gold in the Monetary System
The reason for this continued reliance on gold is its central role in global monetary systems. Governments, however, are reluctant to admit this because it would expose the shortage of gold relative to banknotes.
Currently, central banks are buying gold as quickly as they can. The dollar price of gold today is $2,754 per ounce, a 69% gain in under two years from its price of $1,630 on Nov. 3, 2022. The dollar price of gold has effectively doubled in just over five years.
Understanding the Math Behind the Price Moves
Investors often focus on the dollar price of gold and analyze the price in round numbers. However, it is crucial to understand that each $100 gain is easier than the one before because each gain is measured in constant $100 increments, but the measurement begins from a higher base.
For instance, a price increase from $2,500 to $2,600 per ounce is a 4% gain. But a price increase from $2,900 to $3,000 per ounce, which is the same $100 gain, is a 3.5% gain. This dynamic becomes even more dramatic with $1,000 price increases.
The Future of Gold
The last time gold was taken seriously as a monetary asset was in the mid-1970s, and the last time retail investors showed significant interest in gold investing was in the early 1980s. Despite two bull markets and two bear markets, gold investing has never captured the popular imagination like housing in the early 2000s or stocks today.
However, this is about to change radically. Central banks have shown a significant interest in gold, with their holdings surging from 33,000 metric tonnes to over 37,000 metric tonnes, a 12.0% gain measured by weight. This increase has been heavily concentrated in two countries — Russia and China.
The Role of Central Banks in Gold's Surge
Central banks' net buying is equivalent to about 20% of annual gold mining output. This doesn't indicate a gold shortage, but it does put a firm floor under the dollar price of gold, creating an asymmetric trade.
The BRICS (Brazil, Russia, India, China, and South Africa) recently announced a new blockchain-based digital ledger to record trade payments using existing currencies of the BRICS members. This system, tentatively named "BRICS Clear," involves no dollars and is relatively safe from U.S. and EU sanctions.
The BRICS Clear system can work well, but it leaves two issues unresolved compared to a single currency system: stability in exchange rates while balances are left unsettled, and the overaccumulation of a certain currency by one party that may have limited use for that currency.
The Implications of the BRICS Clear System
The implications of this system have not yet sunk into market pricing. It's tantamount to an informal gold standard without fixed exchange rates. It relies on market forces and does not rely on huge hoards of freely convertible gold in central banks.
Gold is on an upward path driven by central bank buying. It is poised to go much higher because the BRICS will use physical gold as their anchor instead of U.S. dollars.
Bottom Line
The role of gold in the global economy is undeniable. With central banks buying gold and the BRICS using it as an anchor in their new payment system, gold is set to become even more valuable. What are your thoughts on this development? Share this article with your friends and sign up for the Daily Briefing, which is everyday at 6pm.
