Risk of Holding Currency
Central banks around the world got a very rude wake up call from the Russian invasion of Ukraine. They saw how their foreign currency reserves can be lost with the stroke of a pen.
The central bank of Russia came under sanctions after invading Ukraine. The West shut off the Russian central bank’s access to $630 billion in foreign reserves. They also cut them off from the SWIFT banking system.
The 1997 Asian Financial Crisis scared developing countries into increasing their foreign reserve funds. The goal was to shield their currencies from crashes. This pushed official reserves from less than $2 trillion to a record $14.9 trillion in 2021. 1
Investors weren’t the only ones flocking to gold after the invasion. Right now, central banks are actively buying gold to physically keep in their own countries. Last year was the 12th consecutive year of net purchases. Central banks added 463 tons of gold to global reserves in 2021. That was 82% higher than 2020. But gold only makes up 13% of their assets. 78% of the rest is in foreign currency. 2
Other than the gold, these assets can quickly become a liability. Someone can just decide you can’t access them. And if you can’t access them, they become worthless.
Last year, the IMF suspended Taliban-controlled Afghanistan’s access to funds. Sanctions on Iran have confirmed that holding reserves offshore doesn’t stop the U.S. Treasury from taking action.
Stopping major banks, like Russia’s Sberbank, from using dollars and excluding others from the Swift messaging system plunged the Russian economy into chaos. With constantly changing sanctions, foreign businesses are afraid to buy Russian energy.
Banks Turn to Gold
Banks and governments are questioning the value of currency if other countries can determine your stores are worthless. The more rational choice is to stockpile resources like oil and gold.
Russian banks are scrambling to contain a massive collapse in the ruble and a bank run that already started in the weekend. The central bank of Russia resumed buying gold after a two-year pause. Russia already has the fifth-largest gold reserves in the world. They stopped buying gold at the start of the pandemic when prices soared as investors sought safe havens when equity and oil markets were collapsing.
Russia’s renewed buying of gold is set to further support gold prices, which have already risen by more than 6 percent this year.
The America Dollar underpins the world economy. Yet, there is a very small but growing risk that this could change. Especially as nations like China factor politics into their currency.
China owns $3.3 trillion in currency reserves. If it fears that it could be seized, they could start stockpiling commodities.
Weaponizing currency has investors doing what central banks are doing now – buying gold. And this rush to gold by governments and banks is only driving the price of gold up.
Gold prices are already surpassing $2,000 per troy ounce. Goldman Sachs predicts the price of gold will to $2500 an ounce.3
Central banks are losing faith in currencies and are moving toward safe-haven physical assets. Smart investors are following their lead. If you want to learn more about protecting your assets, you can contact American Hartford Gold to find out the advantages of opening a Gold IRA.
Notes:
1. https://www.wsj.com/articles/if-currency-reserves-arent-really-money-the-world-is-in-for-a-shock-11646311306
2. https://schiffgold.com/key-gold-news/central-banks-bought-more-gold-to-close-out-2021/
3. https://www.cityam.com/gold-surges-again-as-goldman-predicts-price-will-top-2500-this-year/
