Central banks buying gold in anticipation of a zombie apocalypse?

Trust and good relations with the US are crumbling

Central banks bought 400 metric tons of gold in the quarter to September, the World Gold Council said this week. This is a record inflow on par with what they would have bought in a whole year in normal times.

In the notoriously opaque world of government gold trading, it’s not always clear who the biggest buyers are. Monetary authorities are such big players that they can distort the entire market by showing what they are doing, one of the reasons why prices collapsed in the 1990s and 2000s when some of the European central banks sold in unison.

There is one obvious common factor among the declared buyers, however: they are all from nations facing serious problems. Turkey, whose lira fell 52% in the year to September, added 95.5 tonnes to its gold reserves over the same period. Egypt bought 44.8 tonnes while its pound fell 20%. India’s purchase of 40.5 tonnes was coupled with an 8.7% weakening of the rupee. Iraq’s dinar is pegged against the dollar, but credit default swaps protecting against a default on its debts rose to nearly 9% in September, even after 33.9 tonnes of the metal was bought.

It’s a curious situation. The accumulation of bullion in the central bank’s vault has long been a powerful signal to investors that the government will be a prudent and reliable borrower. However, no amount of gold buying will convince anyone that the fiscally straitened Egyptian government is good credit. US 10-year Treasuries, currently yielding 4.2%, also look a much better proposition than the non-interest-paying metal, especially now that gold is no longer outperforming the total return on government debt.

Bullion has one outstanding advantage: unlike bonds, they don’t tie you into a relationship with an unreliable counterparty. US government debt was at one point the hardest form of currency, a truly risk-free investment. But in February, coordinated sanctions against Russia’s central bank evaporated most of the $498 billion in reserves sitting on its balance sheet. The European Union is now considering using those funds to pay for Ukraine’s recovery, Bloomberg News reported last week. In a world where you can’t trust anyone, it makes sense to protect yourself with metal.

The path ahead for international relations is now more uncertain than it has been in decades. In this world, it makes sense for central bank reserves not to be too heavily tied to ties to any one country.

Author David Fickling is a Bloomberg Opinion columnist who writes about commodities as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times, and The Guardian.

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