By Nomi Prins, Editor, Inside Wall Street with Nomi Prins
Welcome to our Friday mailbag edition!
Every week, we receive fantastic questions from your fellow readers. And every Friday, I answer as many as I can.
Up first today, a question from reader Bernie on where central banks are getting their gold from…
Central banks are buying tons of gold. From whom?
Who has tons of gold to sell, and why would they sell it? The math does not add up.
– Bernie B.
Hi Bernie. Thanks for writing in!
As I explained in a recent mailbag, global central banks boosted their gold buying practices in 2022. They bought an impressive 1,136 metric tons of gold, worth around $70 billion. In fact, last year’s central bank gold demand was the highest in records since 1950.
And just during February of 2023, global central banks’ gold reserves rose by 52 metric tons.
So, where are these massive quantities of gold coming from?
It would be wrong to think that central banks just trade gold among themselves like they did until the breakdown of the Bretton Woods System in 1971.
The Bretton Woods System was established in 1944. And it pegged all currencies to the U.S. dollar. That propelled the dollar’s supremacy.
Under this system, the U.S. would hold gold as reserves and fix the value of the dollar at $35 per ounce of gold.
This also meant that central banks would trade gold among themselves at $35 per ounce. But they wouldn’t trade with the private market.
Clearly, that’s not how it’s done today…
The most common way for central banks to add gold to their reserves is to purchase it in the over-the-counter (OTC) market. This simply means that a central bank buys gold directly from a bullion bank or an officially-recognized gold refinery.
Third, another common way for central banks to purchase gold is through the Bank of International Settlements (BIS). The BIS is based in Basel, Switzerland. It’s known as “the bank of central banks.”
I dug into the origins of the BIS in my book, All the Presidents’ Bankers. And I shared an excerpt of the key people behind the BIS… the secret motivations behind their involvement… and why it’s so important on an international scale.
Now, central banks can also buy locally produced gold. Of course, this is mostly for gold-producing countries like China, Russia, and Canada.
I view central bank gold buying as an advantage. That’s because the more gold they buy, the more stable the price of gold becomes.
Central banks as a group accounted for about a third of the overall demand for gold last year.
And we see the trend for central bank gold buying increase. That’s because central banks view gold as a currency and financial stability management tool. This is especially important for emerging countries to increase their currency stability.
The BRICS countries in particular need gold to support their currencies and reduce their dependence on the U.S. dollar. That goes double for big BRICS economies like China and India.
As these two nations continue to tighten their relationships with Russia in defiance of the West, it’s a good bet they will remain huge buyers of gold.
For more information about central banks’ gold buying practices, and why I see the trend for gold continue, check out my previous essay here.
Next, reader Rex wants to know about the feasibility of gold as an exchange asset…
Nomi said that we need to have gold in case the USD becomes second fiddle to the Chinese yuan as the world’s international currency and with the onset of digital currencies.
Here are my questions:
How will we be able to exchange gold and silver coins for living expenses – groceries, gasoline, utilities?
Utilities may be located hundreds of miles away. Will these vendors actually take them? And at what value, since the value of the metal far exceeds the face value of the coins?
If inflation grows 50% or 400%, as in some other countries… and economies collapse, won’t so many people and companies sell precious metals? In that case, won’t the value of precious metals actually fall instead of rise?
– Rex R.
Thanks for your questions and observations, Rex!
It’s great to know that you take the time to think so thoroughly about what we publish.
But before I get into all this, let’s make sure we have one thing straight…
I do not believe “the USD will become second fiddle to the Chinese yuan as the world’s international currency.”
Now, China’s yuan is often cited as the closest contender to the U.S. dollar’s long-lasting reign as the world’s primary currency.
But as I explained in last week’s mailbag, the yuan lacks all the attributes required of a global reserve.
For a currency to become popular, it has to be safe, have a stable value and market depth, and have the ability to move without restrictions.
China’s capital controls complicate the international use of the yuan. And as long as the Chinese Communist Party is in power, there will always be questions of trust and transparency.
So, until the yuan can meet the three criteria above, the biggest threat to the U.S. dollar remains the Federal Reserve.
And with that out of the way, your first two questions boil down to whether you’ll be able to pay for things with gold…
Humans of all cultures have used gold as the universal currency for over 5,000 years. It is an excellent store of value. That’s because it is relatively hard to produce. And that won’t change anytime soon…
Two thousand years ago, an ounce of gold bought the average Roman citizen a toga, belt, and sandals. Today, it still buys you a nice suit and pair of shoes. And, if you want a more recent example, 20 ounces of gold will still get you a pretty nice car… as it would have about half a century ago.
That’s why I always recommend holding gold in your long-term investment portfolio. That’s regardless of how the whole de-dollarization situation plays out… Or how many trillions of dollars in freshly-printed money supply the Fed dumps on us.
However, that doesn’t mean I see us going back to a barter economy…
An unprecedented disaster would have to happen for this to become a reality. World War III? A super solar flare attack? A world crop failure? A biotechnology catastrophe?
But, as I mentioned above, gold has served as the universal currency for all civilizations of recorded history. So, if any of these horror scenarios were to unfold, you can be certain your gold would be universally accepted as payment.
That said, handling gold (let alone bartering with it) is challenging. It can be damaged without you realizing it. It also needs to be verified for purity (or if it’s real at all).
You can even argue that bartering with everyday staples like canned foods, liquor, cigarettes, and medicine would be significantly easier…
But none of this changes the fact that one of the simplest ways to buy gold is in its physical form.
You can do that by buying the most popular gold bullion coins. These include American Eagles and Canadian Maple Leafs. Just keep in mind, coins are typically priced at a premium to the gold spot price.
Gold bars have lower premiums than coins, but they’re quite unwieldy.
Of course, the main drawback of investing in physical gold is that coins and bars need to be stored. Doing it safely could mean an additional cost.
But if you want the peace of mind of owning a tangible asset (that you can exchange for cash, if need be), then owning physical gold is your best bet.
You can buy physical gold online through accredited places like the U.S. Mint… or through the Perth Mint Certificate Program. This program offers gold that’s guaranteed by the Australian government. I wrote about this in a recent mailbag, so for more details, go here.
What’s more, I wrote a piece detailing the best places and practices to buy physical gold. If you didn’t catch it, read up here.
Now, onto your remaining questions…
Would the value of precious metals decrease (rather than increase) if inflation becomes hyperinflation?
Every country is different. But if history is anything to go by, gold tends to retain its value in periods of hyperinflation. Sometimes it even outpaces it.
Consider the hyperinflation that occurred in Germany in the 1920s.
The price of one ounce of gold was 170 marks before it happened. But as the value of money evaporated, an ounce of gold was selling for about 87 trillion marks at the end of this period.
Here, we can see how the price of gold rose 1.8x faster than the inflation rate. Gold did what it was supposed to do.
Again, no country is the same… so we don’t really know how a similar hyperinflationary situation would unfold in the U.S. But, then again, we aren’t really banking on a collapse of the U.S. economy.
What we do know is that when economies undergo severe shocks, people flee to safety. And there’s no better safety than putting your money in a time-tested asset like gold.
Plus, since people never know when a crisis will be over, they will buy more (not less) gold to preserve the purchasing power of their money. The example of the hyperinflation in 1920s-Germany I discussed earlier illustrates that point well.
Finally, our last question this week is from William, who questions how clean electric vehicles (EVs) really are for our planet…
What is the breakeven point for the EV revolution? Assuming there are enough raw materials to build all the desired vehicles, how many years of EV use will it take to make up for the damage to the planet caused by mining and manufacturing? People seem to conveniently forget that the majority of raw material comes from countries with no EPA and low regard for how much pollution they cause.
– William B.
Hi William, thank you for these observations. I absolutely agree that mass adoption of EVs will bring a certain degree of environmental uncertainty and related challenges.
But most of those will be solved by one thing: an appropriate recycling solution.
It’s true that most countries (on a national level) don’t have a policy dealing with battery materials reaching the end of their lifecycle.
I can’t speak for other nations, but in the U.S., various groups in individual states are recognizing these issues you’re bringing up.
For instance, in my home state of California, the California Environmental Protection Agency established the Lithium-ion Car Battery Recycling Advisory Group in 2019. It’s researching useful strategies for recycling electric vehicle batteries.
The group issued a report of its recommendations last year. The two main ideas were:
1) For EVs still in service, if their battery is approaching its end of life (EOL), there would be a core exchange program with the battery manufacturer. The manufacturer would then be responsible for recycling the battery and its materials.
2) When an EV battery reaches EOL, the auto manufacturer would be responsible for ensuring “proper repurposing, reuse, or recycling,” at no cost to the consumer.
There are a growing number of firms that handle that. Li-Cycle (LICY) in Ontario, Canada is one I’ve heard of. It was founded in 2016.
And there’s Retriev Technologies in California. That’s been around for more than 30 years (previously called Toxco), but it isn’t publicly traded.
To be clear, I’m not recommending these companies as investments right now. I just wanted to demonstrate that there are companies addressing these issues. And I’m sure we’ll see many more down the line.
EV batteries are tough to recycle. The technology surrounding the recycling (and reusing) of these batteries is still inefficient.
But if we can eventually figure out a way to recycle much of the volume of batteries produced, the world will require much less battery production. This means less mining, less manufacturing, and less pollution…
The world will get there eventually. Until it does, securing a domestic or “friendly” supply of lithium, nickel, and other battery metals should be the top priority. That’s important for both the environment and our nation’s energy security.
And that’s all for this week’s mailbag. Thanks to everyone who wrote in!
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
Happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins