Central Banks Are Buying The Gold Top

In investing, “Buy low, sell high” is among the most well-known sayings, and generally, it’s good advice. But with gold still holding near its historic all-time highs, central banks led by China are bucking the classic adage and smash-buying more, buying the top to fortify themselves against a global monetary and financial blow-up.

Last month marked the 17th in a row that the People’s Bank of China (PBOC) continued stacking gold. Notably, the bank typically reports lower numbers than its actual buying volume and is now also introducing a digital yuan to facilitate cross-border gold settlements.

Russia is also doubling its reserves of gold and foreign currencies on its de-dollarization path, further detaching Russia from the petrodollar empire as it reacts to wartime sanctions from the US and EU. There are other blips on the de-dollarization map as well: though much smaller than Russia and China, Zimbabwe has a new gold-backed currency that lets them dump the USD for trade with China and other countries.

Chinese citizens are trying to divest as well, but from their economy — Chinese buying has become so blistering that gold ETFs have gone haywire, with China repeatedly halting trading as ETFs rocket upward at a gobsmackingly-high premium against physical bullion. It has become increasingly difficult for the Chinese to invest outside of China, due to attempts by the regime to keep investments within the country. Citizens are trying to make moves to protect themselves against their perceptions of domestic economic uncertainty.

Meanwhile, expectations that the Fed and other Western central banks will be cutting rates this year amidst continuing wars in Ukraine and the Middle East provide further rocket fuel for the gold price, with central bank buying helping it hold its new levels despite whatever else seems to be going on in global markets.

A Year of Central Bank Buying: Gold vs USD April 2023 – April 2024

Source: Bloomberg

While shorter-term corrections are always to be expected, the macro factors support the view that, despite its awe-inspiring path upward in the past few months, the rally for gold hasn’t finished. While inflation isn’t contained, the Fed is expected to stay the course with planned 2024 rate cuts that will make dollar weakness even worse. This can only mean higher prices for gold against USD.

Reacting to warnings from Bloomerberg about ballooning debt and the powder keg of inflationary pressure, Peter Schiff said:

“We have a much bigger problem than they acknowledge — that’s why the price of gold is at a record high, that’s why it’s going to keep going up.”

With the overstretched and over-indebted American empire increasingly in a state of potentially terminal decline, BRICS countries are stacking hard assets with the hopes of overtaking the West as the next economic superpowers in the coming decades. While they have fiat currencies of their own, none have anything resembling the world reserve currency status enjoyed by the USD. Buying the top even as gold continues upward tells a story of their future visions of US dollar chaos.

Besides, if you expect the dollar to fail, as dominant fiat currencies historically have, then “the top” doesn’t matter — if the bottom for fiat is zero, then there’s no meaningful top for hard assets like gold in fiat terms. And just as you didn’t want to be the last schmo holding seashells when no sane person would give you even the tiniest sliver of gold in exchange, it’s wise of central banks to avoid being the last ones trying to trade worthless paper for gold that, when fiat is functionally dead, will be infinitely more valuable.

Because when you zoom out far enough, the exchange price of fiat currencies always reverts to its true value of zero.