Why Central Banks Invest In Gold | How The Gold Standard Continues To Affect The Financial System


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In our last video, we reported that many countries just joined the gold buying party. In this video, we want to discuss why, of all the assets in the world, do central banks count on gold to hedge their country’s economy?

#1- Based on decades and decades of data, there is no other asset that can mitigate risk

Gold is a well-known safe haven investment prone to acting positively in times of uncertainty and market volatility. It is viewed as an asset that holds no liability, adding to its ability to mitigate risk.

American banker and financier JP Morgan is famously quoted as saying: “Gold is money. Everything else is credit.”

Central banks look to purchase gold as a hedge against a weakening dollar or any other fiat currency.

The Dutch National Bank said they always have a lot of gold in stock. After all, gold is the ultimate nest egg: the trust anchor for the financial system. If the entire system collapses, the gold supply provides collateral to start over. Gold gives confidence in the strength of the central bank’s balance sheet. That gives a safe feeling.

#2 – Gold is a hedge against inflation

Inflation is the rise in price of a basket of goods.

In order for inflation to not dramatically impact a country’s economy, the nation requires investments that are not tied to the dollar. Gold is not tied to the dollar. In fact, it is not tied to anything.

Each time the economy collapses or the dollar weakens, gold goes up.

#3- It has zero counterparty risk. The gold market is global, and the metal carries zero counterparty risk. It cannot go bankrupt, default, or otherwise screw its owners. Gold is recognized and valued all over the globe and is always accepted as payment.

#4- Gold cushions growth

As currencies become increasingly devalued, banks must ensure their respective economies don’t go down with it. Take a look at Chinese and Russian central banks. Owning gold prevents their economy from tanking entirely.

Gold is the ultimate currency, and having a gold holding as part of central bank reserves provides central planners a powerful tool to intervene in the markets for whatever purposes.

Luckily, the US holds the biggest gold reserve. It has twice as much as the second placer, Germany.

Italy, France and Russia take the third, fourth and fifth spots. China and Switzerland hold the sixth and seventh positions.

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