Central banks in the driving seat

First it was behind the curve when it came to rising inflation. Now it looks like falling behind a slowing economy.

The US central bank, the Federal Reserve - or rather the FOMC, the Federal Open Market Committee, which decides interest rates - this week left interest rates unchanged, in the 4.25%-4.5% range, despite cutting its expectations for economy growth in the fourth quarter of this year to 1.4%. While Switzerland has now returned to ZIRP - zero rate interest policy - the Fed (and the Bank of England, BoE, which has also left rates unchanged) are paralyzed, afraid of a fresh inflationary spike that may never come.

They are uncertain where the global economy is headed, so they do nothing. The FOMC said "Uncertainty about the economic outlook has diminished but remains elevated. The committee is attentive to the risks to both sides of its dual mandate." That mandate is to ensure price stability and try to achieve full employment.

The biggest uncertainty facing the Fed is America's growing debt pile. The US, with its national debt of $37 trillion, and the world's reserve currency, is the world's main debtor. It has more than twice China's debt, is around three times bigger than Japan's, more than ten times the UK's. Under the planned budget that debt may grow by almost $3 trillion over the next decade.

Uncertainty, huge debts, fiscal holes, rising government borrowing, costs of that borrowing going up and up - no wonder the world is turning to gold. Fiat money is running on empty.

Central banks and gold

As governments and central banks fear another global financial meltdown amid nasty wars around the world, central banks are stocking up on the only asset that is no one's liability and carries no credit risk - gold. Why? They believe and are right to believe that gold is a good defensive asset. Its rise in Dollars of around 40% in the last 12 months speaks volumes.

The latest central bank gold reserves survey by the World Gold Council (WGC), which received 73 responses, finds that around 69 of them think that central bank gold reserves globally will increase over the next 12 months; about 31 of them think their own gold reserves will increase over the same period - none report an expected decline. Central banks often don't report their gold transactions - we may learn much after the event what buying has gone on.

According to Nassim Taleb, who articulated the 'black swan' event in 2001, "gold is effectively now the reserve currency...the perception of America is that the riskiness of America has increased...we have now a move into gold by people who are afraid of these policies, especially central banks around the world."

Taleb is not alone.

Central banks lead

Central bankers don't have any special insights into where the economy is headed; they have the same evidence as the rest of us. Their intention - as evidenced by the WGC survey - to buy more gold is no guarantee that they actually will.

But nor should we ignore the survey. Central banks are the biggest 'whales' in the gold market - their transactions move prices. In the past decade they have bought more than 7,800 tonnes; in the past three years they have bought more than 1,000 tonnes a year, more than twice what they bought in the preceding decade. If the survey has any accuracy it suggests the Dollar price will continue its bull run. Guessing when the US might run out of willing lenders at an interest rate it can afford is futile; but all roads eventually run out.

Alignment with institutional actions, like those of central banks, isn’t uncommon among seasoned observers. Moreover, gold bought with Glint allows you to use gold as e-money. So you can insulate yourself from the depreciation of your fiat currency, due to inflation, and benefit from an asset that went up 44% last year and continued to rise.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, 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.

For US clients: Graphic representations of value are for illustrative purposes only. The Glint debt card is issued by Sutton Bank, member FDIC. The sale, purchase and storage of precious metals are offered by Glint and not Sutton Bank. Your investment in precious metals through Glint is

·        Not insured by the FDIC.

·        Not a deposit or other obligation of, or guaranteed by, Sutton Bank.

·        Subject to investment risks, including the possible risk of loss of the principal amount invested.

All investments involve risk, including possible loss of principal. The value of precious metals is affected by many economic factors, including but not limited to the current market price, demand, perceived scarcity, and quality of the precious metal. Precious metals can increase or decrease in value. Past performance is not a guarantee of future results. As such, investing in precious metals may not be suitable for everyone.