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Category: Bullion Bulletin

Bullion Bulletin: New leader, old problems

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In the UK, Prime Minister Liz Truss takes office “with the economy in as dire a state as it’s been since the 1970s” says Bloomberg.

Inflation is at 10.1%; next year it might breach 20%, for the first time since 1974. Interest rates might rise to almost 5% by May next year. Energy bills (now capped at huge cost) were looking like pushing many as 14 million households into fuel poverty. The Bank of England (BoE) expects a recession by the end of this year. Trade unions are talking of a national general strike, which would be the first since 1926. The Pound Sterling is at its lowest in almost 40 years; investors might be starting to think the UK’s economy is in trouble – which it is. The UK’s trade deficit (the difference between the value of its exports and the cost of its imports) was £27.9 billion in the second quarter of this year, the largest quarterly deficit since 1997.

What can Truss do to tackle these problems, any one of which would cause an almighty migraine for a Prime Minister? She gets full marks for bullishness, proclaiming “we will deliver, we will deliver, we will deliver” as she was declared the winner of the contest to be the Conservative Party’s new leader (and thus, de facto, Prime Minister). But what will she deliver?

Early in her campaign to be selected by the 172,000 or so members of the Conservative Party she pledged massive tax cuts – which might stimulate economic growth but only in the long term. Truss said her tax cuts will cost £30 billion a year, but others put the cost at almost double that. All the UK’s problems need responses now.

Prime Minister Truss has chosen a short-term option to tackle the rising tide of household and business energy costs, giving an “energy price guarantee” (effectively a retail price freeze, no matter what wholesale prices do) to households or two years and six months to businesses. She obviously hopes this will give her Conservatives a chance of winning the next general election, which might not be until 2024. Government officials have not said what the gross cost of this price freeze will be, but estimates have put it at about £150 billion; it could be much higher, with the taxpayer massively exposed to possibly rising wholesale gas prices. The risk is that kind of mammoth handout – far more than made during Covid-19 – will vastly increase government borrowing. Simply servicing the UK’s existing national debt will cost around £100 billion this year.

Debt interest spending was forecast to reach £83 billion next year (2022-3), the highest nominal spending ever and the highest relative to GDP in more than two decades. It’s nearly four times the amount spent on debt interest in 2020/21 and exceeds the budgets for day-to-day departmental spending on schools, the Home Office and the Ministry of Justice combined.

Populism – the need to win votes – struggles against economic reality. The UK government’s gross debt has risen astonishingly rapidly in just six years, from £1.731 trillion in 2016, to £2.382.8 trillion in 2021. As a proportion of debt to gross domestic product (GDP, what the UK produces) it has risen from 85.8% in 2016 to 102.8 last year. There’s no simple guidance as to what the GDP/debt ratio should be – Japan’s for instance is 260% but investors consider the likelihood of a Japanese sovereign default remote. The key is credibility – are the important institutions, such as the central bank, robust and independent? – and the relative strength of the economy. On that score the UK is weak. The National Institute of Economic and Social Research said in June this year: “In the three decades since the Second World War, the average annual productivity growth rate (output per hour worked) was around 3.6%. The following three decades saw this fall to around 2.1%. From the start of the financial crisis in 2007 to 2019, this declined even further to 0.2%…if productivity had continued to grow at two per cent per year in the last decade, it would have meant an extra £5,000 per worker per year on average”. Truss has said she is a “great believer” in the independence of the Bank of England, but she has also said she will “review” the bank’s mandate.

In 1976, a previous Prime Minister, the Labour Party’s James Callaghan, told his party’s annual conference: “We used to think you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour, that option no longer exists”. That year the government, struggling against a variety of internal (a stagnant economy) and external shocks (including rapidly rising energy costs: sounds familiar?) was forced to borrow £3.9 trillion from the International Monetary Fund (IMF).

The road ahead for the UK economy is thus littered with risks. Former Chancellor of the Exchequer Philip Hammond says “I’m sceptical about whether we’ve got room for big increases in spending and tax cuts…The UK economy is perhaps more fragile than many UK citizens understand”.

Where does this leave gold? Because gold is priced in US Dollars, when the Pound Sterling falls against the Dollar then gold costs more in Sterling terms. But this works both ways – as the stronger Dollar has made gold more expensive for buyers in other currencies, gold in currencies other than Dollars has done remarkably well in 2022; in Pounds Sterling for example the gold price has gained more than 9% this year, despite ups and downs.

The risks for the UK economy may defeat Liz Truss. One of those risks is baked in, which is that the Pound is set to lose at least 10% and maybe 20% of its purchasing power. Perhaps the biggest risk for individuals is failing to try to hedge, to take safeguards, against what is likely to be a stony road. Gold remains one of those safeguards.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

Bullion Bulletin: Currency moves and gold

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The Dollar-denominated gold price has weakened recently and that demands an explanation. Surely, when inflation is soaring, gold ought to be doing well?

It all depends on what one means about ‘doing well’.

The Dollar price of gold has lost about 4.5% since the start of this year. But other asset classes have done rather worse.

The Dow Jones Industrial Index since the start of January was down by 11.8% by 29 August. The S&P 500 has dropped by more than 15%, the Nasdaq by more than 23% and Bitcoin is down by a whopping 58%.

This has combined with weakness in a number of currencies, especially those of emerging markets. The Indian Rupee has lost 7% of its Dollar value since the start of the year; the Philippines, Thailand and South Africa currencies have dropped by around 9% against the Dollar, and the Turkish Lira by 27%. Currencies of developed countries, such as the Euro, the British pound, Japan’s Yen, the Swiss franc, the Canadian Dollar, and the Swedish Krona have also lost ground to the Dollar, about 13%.

The weakening of these other currencies has seen gold rise significantly when measured in their terms. When measured in Euros gold has gained almost 7% since the start of the year; in Japanese Yen the gain so far this year is more than 13%. And in Pounds Sterling the gold price is so far this year up more than 9%.

For more than a year, the US Dollar has slowly been strengthening relative to other major currencies, and has touched a 20 year high. The Dollar is trading around par with the Euro. The Dollar tends to strengthen whenever the global economy experiences a crisis (and we have crises galore right now), as nervous investors seek out what is traditionally a safe place to park their money – which has long been the Dollar. Not only that, but America’s central bank, the Federal Reserve now appears finally to be getting serious about tackling inflation. Federal Reserve Bank of Richmond President Thomas Barkin has promised that the bank will do “what it takes” to get inflation back to its target of 2%. Jerome Powell, chairman of the Fed, said recently that it must “keep at it until the job is done”, widely seen by financial markets as indicating the Fed will continue to raise interest rates – causing the Dollar to strengthen further.

Many analysts are now expecting a recession to hit the Eurozone, the UK, and the US, defined as two successive quarters of declining economic output over the course of the next year. Historically, the gold price has tended to advance in recessions, although this is by no means a guarantee.

Higher interest rates in the US mean not only a stronger Dollar and therefore a disadvantage for American exporters, but a higher cost of US borrowing. The Congressional Budget Office (CBO) this year calculated that annual interest payments on the national debt will total $399 billion this year; by 2052 the CBO estimates that interest payments on the current trajectory will take nearly 40% of all federal revenues.

The Dollar looks safe – for now.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

Bullion Bulletin: Russia’s latest revolution

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Karl Marx once said “although gold and silver are not by nature money, money is by nature gold and silver…”. President Vladimir Putin seems to think the same way – Russia’s central bank has tripled its gold reserves since it annexed Crimea in 2014.

Russia’s determination to humble the West’s political hegemony was shockingly announced in February when it sent its tanks into neighbouring Ukraine. It’s also accelerating its other and no less significant ambition, that of re-drawing the current monetary, US Dollar-dominated, global hegemony.

President Vladimir Putin fired his first missile in this monetary war in June this year at a summit meeting of the BRICS countries – Brazil, Russia, India, China and South Africa. He said then that the BRICS countries were developing a “new reserve currency”.

Some see this as a move “to address the perceived US-hegemony of the IMF [International Monetary Fund]” and its international reserve asset, the SDR (special drawing rights, which is based on a basket of the US dollar, the euro, the British pound, Japan’s yen, and China’s yuan).

China’s Renmimbi has already made inroads into Russia’s foreign exchange reserves, about 17% of which are now in the Chinese currency; China has not joined the sanctions imposed on Russia by the West. Russia has completely removed all US dollar holdings from its National Wealth Fund, the country’s sovereign wealth fund.

Russia’s finance ministry has now announced it is backing a new international standard for trading precious metals – the ‘Moscow World Standard’ (MWS) it calls it – which it says will become an alternative to the London Bullion Market Association (LBMA). The LBMA systematically manipulates precious metals markets to depress prices, suggests Russia’s ministry of finance. The MWS, which will also have a “price fixing committee”, is necessary for “normalizing the functioning of the precious metals sector” says the ministry.

The London OTC (over-the counter) gold market, under the auspices of the LBMA, “today comprises approximately 70% of global notional trading volume” according to the World Gold Council (WGC). Re-setting the global gold trade will be an enormous undertaking, and would have profound business and economic effects. Russia produced 314 tonnes of gold in 2021, about 10% of the global total and worth some $19 billion at current prices. That gold is mainly sold to Russian commercial banks, which sell it to the Russian central bank or export it. Since the war started, Russia’s customs service and central bank have suspended publication of import and export data and information about state gold holdings.

In one sense Russia is taking retaliation – the LBMA removed Russian gold refiners from its accredited list in March this year. On another level the MWS is a dagger aimed at the heart of the way the gold market has been managed for many years. If it succeeds, Russia will have created a precious metals marketplace that will be regulated by countries that control these metals’ production. The Eurasian Economic Union (Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia), the BRICS and Africa, Peru and Venezuela, account for around 62% of global gold supply. All are eagerly sought as members.

There are many questions about the promised ‘revolution’, not the least of which is – will it get off the ground? If the MWS does, it will certainly be disruptive to have two competitive ‘good delivery’ standards co-existing and vying for business. Will markets have the kind of confidence in the MWS that has been generated by the LBMA? Those ‘allies’ of Russia, all the countries which have not sanctioned it, will no doubt queue up to support it.

Nevertheless, questions of honesty, quality control, and storage security will inevitably crop up. Most important of all perhaps are: what will the “price fixing committee” decide the price per ounce should be; in what currency will that price be quoted; and against what will that price be benchmarked?

Bullion Bulletin: China springs a surprise

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China’s central bank surprised markets last week by cutting its key interest rate, lowering the medium-term lending rate from 2.85% to 2.75%, the first cut since January this year. This at a time when most central banks around the world are raising interest rates to try to stifle inflation. Inflation is creeping up in China, the consumer price index (CPI) annualised rate rising to 2.7% in July, the highest in two years but still far below the inflation figures for the US (8.5%) and the UK (9.4% in June).

China’s inflation is likely to remain subdued, largely because domestic demand remains weak thanks to the country’s zero-Covid policy, closing down cities where outbreaks occur. On the day the interest rate cut was announced the gold price dropped 1.3% on speculation that the interest rate cut was aimed at batting away indications of a recession, an economic downturn that would hit Chinese gold buying. Reports are that Chinese consumers are “more pessimistic about future income growth than they’ve ever been – even at the pandemic’s start in 2020 or after the [2008] global financial crisis”, which is encouraging them to cut debt and increase savings.

Figures for industrial production and retail sales in July showed sharply slowing year-on-year growth respectively of 3.8% and 2.7%, against expectations of 4.6% and 5%. This follows a modest 0.4% year-on-year expansion of the economy in the second quarter of 2022, and against the 4.8% in the first quarter. Beijing has set a target of real growth in gross domestic product (GDP) of 5%-plus for this year, but it’s unlikely to achieve that.

The Caixin Purchasing Managers’ Index, a closely watched indicator of the underlying state of China’s economy, dropped to a low of 36.2 in April this year; anything below 50 indicates contraction, while anything above 50 shows expansion. In June, it rose to a 13-month high of 51.7, a fragile return to expansionist mode; by July, the index had fallen again, to 50.4. Fears of a recession are widely discussed; according to the head of a major steel group almost a third of the country’s steel mills could go into bankruptcy, partly as a result of a slump in the property sector; the 100 leading property developers saw their sales drop by almost 40% in July. Youth unemployment (the ages of 16 to 24) has reached more than 19%. For an economy so dependent on sales of accommodation and for a government that needs to infuse its young people with optimism, these are worrying facts.

As for China’s gold demand, it’s currently stuck between Scylla and Charybdis, rather like the economy as a whole. Last year China’s demand for gold coins and bars rose by 44% year-on-year to 285 tonnes, according to the World Gold Council’s (WGC) latest annual report. Gold jewellery purchases reached 675 tonnes, a year-on-year increase of 63%. The WGC says China imported 107 tonnes of gold in June, “the highest in five months and significantly above the 2019 pre-pandemic level”. Chinese consumers, as price sensitive as any, have not lost their taste for gold or luxury objects; they might be finding it a little more difficult to afford the cost. Popular brands of luxury watches and bags have lost up to 50% of their value on the secondary market since Shanghai, China’s financial and commercial capital, imposed a strict lockdown in March. The WGC said recently that the outlook for gold in 2022 will be heavily dependent on the world’s two biggest consumers – India and China – to counter weaker investment demand. China’s demand in the second quarter of this year dropped by 31% said the WGC, partly as a result of the economic slowdown.

Bullion Bulletin: Commodities cool a little

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Commodity prices cooled a little in July, according to the World Bank. By mid-July the US Dollar had gained 12% since the start of this year, which played a part in depressing commodity prices.

Energy prices fell 1.3%, led by a 10% drop in crude oil, but natural gas went up by more than 50%. Food prices fell by 8.5%, led by a drop in grains’ prices of more than 8% and a 13.1% drop in oils and meals. Fertilizers fell by almost 4%. The biggest fall was the almost 30% drop in palm oil prices. These price drops will help cool inflation in the coming months.

But the biggest drops, and a lead indicator of the likelihood of a global recession, came in base metals, which are in greatest demand by industry; their prices tell us much about the probable future direction of the economy. The tin price fell by almost 20%, that of iron ore by 17%, and copper and nickel by 16% each. If a global recession arrives – technically, the US is already in one – the big question will be how deep it might be. The economist Nouriel Roubini, who predicted the 2008 financial crisis, told Bloomberg TV recently that “there are many reasons why we are going to have a severe recession and a severe debt and financial crisis… The idea that this is going to be short and shallow is totally delusional”.

The bank reports that the gold price dropped by 5.65% from June to July, from $1,837/ounce to $1,733.

Some investment banks have nevertheless raised their forecasts for the gold price by the end of this year. Goldman Sachs for example at the end of June estimated the price would rise to $2,500/ounce. Mid-July Wells Fargo said that gold could still end this year above $2,000/ounce, even though a stronger Dollar helped depress the gold price. J. P. Morgan however said in early June that the price would remain around $1,800/ounce in the third quarter of this year.

Since 1971, when the gold standard finally was killed off by US President Richard Nixon, gold has generally seen improvements in its price during recessions. In the last three recessions since 2000 its performance has bettered that of the S&P 500.

At Glint, we make every effort to demonstrate balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

Bullion Bulletin: Zimbabwe’s gold bet

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While Honduras seems cautiously to be following a path trod by its Central American neighbour El Salvador, and accepting Bitcoin in payment in some parts of the tourist spot of Santa Lucia, a short distance from the capital of Tegucigalpa, the African country of Zimbabwe has launched gold coins as legal tender. The intention is to try to halt rampant inflation by providing a source of value that the country’s citizens can trust.

Zimbabwe has sporadically suffered from hyperinflation (technically, prices rising by 50% or more a month) and is on the verge of another taste of the same – inflation in June this year rose to 192%. The country’s central bank has put its key rate up from 80% to 200% as a consequence. In November 2008, the country’s estimated annualized inflation rate was almost 80,000,000,000%. That was a daily inflation rate of 98%, headed towards Hungary’s 1946 daily rate of 195%.

Zimbabwe’s inflation sickness owes nothing to the spike in prices of imported essential commodities. The Ukraine war may be contributing to higher prices, but this is a long-standing problem entirely related to high indebtedness and the printing of more money to finance it.

Hyperinflation meant that people could no longer afford basic goods, banking activity became paralyzed, a barter economy arose, savings were wiped out, and output collapsed. Eventually the government stopped printing Zimbabwean Dollars and normalized the use of the US Dollar. The Zimbabwean Dollar was formally demonetized in 2015, only to reappear in 2019 as the Real Time Gross Settlement (RTGS) Dollar, which has now lost almost all its value against the US Dollar.

John Mangudya, head of Zimbabwe’s central bank has now introduced the Mosi-oa-Tunya gold coins, which is Sotho (and means the smoke which thunders), otherwise known as Victoria Falls, a tourist attraction on the Zambezi River. 2,000 of the Mosi-oa-Tunya gold coins, each weighing one troy ounce, went on sale on 25 July with an opening price of $1,823 or Zimbabwean Dollars 805,000. This is out of reach of most Zimbabweans, where the average annual salary is around $230. The coins have “liquid asset” status, so can be converted to cash, used for transactions, and traded locally or internationally – 180 days after they have been purchased. Each coin is priced at the international market rate for an ounce of gold plus 5% for production costs.

The aim of the gold coin is to cut Zimbabweans’ appetite for foreign currency. Mangudya was explicit that he hopes the coins will be seen as a store of value. He has said that we “are now providing that store of value to ensure that people do not run to the parallel market in search for foreign currency to store value… And there is no other better product that can be used to store value other than gold…We know what you have been going through in terms of the fear factor of losing value and therefore we are providing this gold coin”.

Will it work? According to a local finance analyst: “not on their own and the market has to be pliable and play ball. Confidence has to return especially to big players sitting on those large amounts of Z$. Likely, overtures to them have been made behind the scenes already, which explains why the central bank is not going all out on a campaign blitz… if the ‘big players’ are agreeable and believe in the vision then the gold coin will prevail. Otherwise the mathematics is screaming a different story”.

Bullion Bulletin: The inflation dilemma

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US inflation was more than 9% in June, which sounds bad enough – the highest it’s been in more than 40 years – but within that headline figure there are many worse: over the past 12 months gasoline has gone up in price by more than 60%, airline fares (America is a big country) by more than 40%, and food prices – which hit the poorest hardest, and they spend a proportionately bigger amount of their income on food – have soared. Eggs are up 33%, chicken by almost 20%, milk by more than 16%, butter and margarine by more than 26% and coffee by almost 16%.

This is not merely a cost-of-living horror. It also draws into question the reliability of the guidance and control over price policy of the world’s most important central bank, the Federal Reserve. All last year, the official line of the Fed was that inflation was ‘transitory’. That was wrong, and many stated that it was wrong at the time. So why should we now give the Fed any credit when it claims it can bring inflation under control?

Having fallen behind the inflation story, the risk is that the Fed will now act with considerable aggression when it comes to the main tool it has for putting out inflation’s flames – interest rate rises. And that this will induce a recession not just in the US but elsewhere. The European Commission has cut its forecast for Eurozone economic growth, to 2.6% and to 1.4% for 2023 and revised higher its inflation expectations, to 7.6%, for this year. The Commission says that the “rapid increase in energy and food commodity prices is feeding global inflationary pressures, eroding the purchasing power of households and triggering a faster monetary policy response than previously assumed. Furthermore, the deceleration of growth in the US is adding to the negative economic impact of China’s strict zero-Covid policy”.

The Federal Funds Rate – the main reference for interest rates in the US – is currently 1.5% to 1.75%. And that means interest rates are still around 7% negative real. The betting is now that the Fed will this month raise the rates by 0.75%-1%. “Such a belated policy reaction will increase the risk of a recession, especially given that economic activity is slowing”, says one commentator, but that voice stands for many.

Central bankers are facing the trickiest task imaginable – to control inflation (and put up interest rates high enough, much higher than now) they must decide whether the inflation we have is running out of steam. If it is then they can afford to relax a little, live with the high price explosion, and wait to inflation to die away. Crude oil prices, which underpin the costs of many sectors, fell back to their level prior to Russia’s invasion of Ukraine on 14 July, as fears of a recession cut demand; data from the US Energy Information Administration suggested gasoline demand had slipped to its lowest level for the time of year since 1996. This plays somewhat into the “inflation is transitory” narrative – it’s transitory but only in the sense that a stopped clock tells the correct time twice a day. Yet if inflation proves much stickier, companies continue to struggle to fill job vacancies, and demand does not substantially drop away, to not raise interest rates risks laying the ground for a much bigger economic crack-up in the future.

But if the US is already slowing, as parts of the country’s economy already is, then to tighten credit and make money more expensive by pushing rates up runs the risk of tipping the US from a slowdown into an outright recession. The Federal Reserve was wrong-footed last year, and this year it might prove to be utterly legless.

Bullion Bulletin: Dollar Strength

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Bullion Bulletin Dollar

The US Dollar is marching high, now it has reached parity with the European Union’s Euro. It’s gained 15% against the Pound Sterling, 16% against the Euro and 23% against Japan’s Yen in the past 12 months. This strength creates a number of problems, not least it will contribute to inflation, as most commodities are traded in US Dollars – so when the Dollar strengthens, these items cost more in local currencies. Furthermore, many countries owe their debts in US Dollars – they owe much more today than this time last year. The risk of there being more Sri Lanka’s has become greater; sovereign debt crises are made of this scenario. A stronger Dollar means that other countries will buy fewer US goods, and the US trade deficit (the difference between what it sells and what it buys), which is already almost $1 trillion/year, will get bigger.

US Dollar index against a basket of currencies

Why is the Dollar doing relatively well? Partly because the US is putting up interest rates to try to tame inflation, partly because the country is halting the creation of money, partly because of expectations from financial markets – the world is becoming alarmed about the prospects of a global recession at a time when prices are still on the up; stagflation, very low or no economic growth combined with inflation, is the great fear. The energy squeeze which has already pushed prices to record levels will get worse, according to the head of the International Energy Agency. “This winter in Europe will be very, very difficult” he said.

Stagflation is, fortunately, a rare phenomenon. In previous stagflationary episodes, gold has held up well: between the third quarter of 1973 and the first quarter of 1975, US gross domestic product (GDP) declined in real (i.e. inflation-adjusted) terms and at the same time inflation rose from 7.4% to 10.3%. In the same period, gold prices went up by 73%. The late 1970s saw an economic slowdown combined with accelerating inflation, and the gold price more than doubled in 1979. Of course past performance is no guide to the future; yet as equities (as measured by the S&P 500 index) recorded their worst first half of the year since 1970, and pent-up price rises for basic consumables seem around the corner, the likelihood of a recession and/or stagflation is increasing. Speculative assets have lost as much as 70% of their value so far this year, but gold has remained relatively stable.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

*Bullion Bulletin is an economic opinion piece from Glint that is emailed every Wednesday to our Newsletter readers. Make sure you check your email every week to stay abreast of world events that are likely to have an effect on gold. The story is repeated as part of the Friday edition of the Glint Newsletter, The Treasury, and can also be found in the blog section of the Glint website at

Bullion Bulletin: How’s El Salvador’s Bitcoin experiment?

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Bullion Bulletin El Salvador Bitcoin

It’s been almost a year since the Central American country El Salvador became the first country to make Bitcoin legal tender, more or less on a whim by the country’s leader, President Nayib Bukele. The so-called ‘Chivo wallet’ was introduced at the same time, with a range of perks to tempt consumers to download and use it for their Bitcoins.

The President has doubled down on his Bitcoin bet, even though the asset has fallen by 63% since the El Salvador’s first purchase, dropping below $18,000 in mid-June. At the end of June, the government bought another 80 Bitcoins at around $19,000 apiece. That brings the total amount El Salvador has spent on Bitcoin to more than $106 million since last September.

Bitcoin use according to the NBER:

Yet despite this top-level endorsement, Bitcoin is failing to make inroads among the general public; a study by the US National Bureau of Economic Research (NBER) says its use in daily life is not widespread. The NBER says that “in theory” developing nations like El Salvador are “ideal candidates for cryptocurrency adoption. More than half its citizens rely exclusively on cash, rather than credit or debit cards. Some 70% of households have no bank account and nearly 90% do not use mobile banking. A digital payment platform could be a way to make the economy more inclusive and accessible”. Among early downloaders above 60% have not yet made a transaction after spending the free $30 in Bitcoin that came with the Chivo account (almost 1% of average annual per capita income); a small group of consumers, “most of whom are banked, educated, young, and male”, are very active with the app. The law requires all firms to accept Bitcoin, but only 20% do so. The NBER says that “just as most households using Chivo prefer to keep their money in cash rather than in bitcoin, 88% of firms convert their bitcoin into dollars”.

El Salvador’s embrace of Bitcoin has also complicated the country’s fiscal situation. The country has an outstanding $800 million bond, which becomes due next January. Investors are concerned that it will struggle to meet this debt and it is therefore likely to get the funding it needs to roll this debt over. S&P Global Ratings have downgraded the country to CCC+, which puts it at the same level as Argentina and Ukraine. El Salvador’s gross domestic product (GDP) is put at $25 billion, so even if Bitcoin were to completely implode, the country would not. President Bukele remains popular; he has taken control of the executive, the legislative and also the judicial power. El Salvador last year sought a $1.3 billion loan from the International Monetary Fund (IMF), but as far as the IMF is concerned Bitcoin holds risks to “financial stability, financial integrity, and consumer protection”. It wants the country to “narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status”.