Central banks, Gold & The Wakeup Call

Lets take a little walk through recent history… When we left the gold standard (where money was backed by gold) in the early 70’s central banks (in theory) didn’t need gold in their reserves and they became net sellers.  That also marked the beginning of the biggest credit expansion in history as the discipline of gold was abandoned and debt was used to ‘fix’ politically inconvenient but ‘financially natural’ phenomena (take note of all the spending promises here in Australia until 2 July election – its ALL deficit funded).  The credit expansion party was awesome, the rich got much richer and everyday people borrowed off their mortgage to feel just as rich.  Then a little thing called the GFC happened.  This was the first serious wakeup call that maybe all this debt wasn’t such a great thing.  Of course, since then global debt has expanded by another 40% to try and double down and reflate the economy (ironically lagging under said debt) to the point where global debt sits at around $200 trillion and growth is moribund at best.

Central banks clearly saw the GFC for the wakeup call it was.  The chart below shows net central bank purchases.  You might notice a change in behaviour since the GFC…

Now we are not saying for one minute all central banks have been fiscally prudent since the GFC.  Indeed it is arguably the opposite.  They have printed money at a reckless pace and suppressed rates to even negative territory to fuel that debt expansion.  What the chart above might indicate is they are putting their ‘hedge’ in place for what they’ve done in the chart below (hint – an ‘asset’ on a central bank’s balance sheet is in fact debt .  It is the bonds associated with all the money they’ve printed):

Most of the commentary explaining gold’s big rise in 2016 has been around a growing loss of faith in these very same central banks.  That the Fed might raise rates in June with the obvious ramifications reinforces that.  And that is why this final chart shows first-quarter-only sales of investment gold this year approaching full year sales since 2013.  This is the flight to safety that always happens in times of trouble.