Canada Says Farewell to Gold
One upon a time most currencies were backed by gold. But in 1971 president Richard Nixon took the U.S. off the gold standard switching to a floating currency instead so its Central Bank can exert more influence over the currency, and other countries followed suit. Today, everyone uses fiat currency and gold is no longer relevant on the world’s financial stage.
Canada use to have more than 1,000 tons of gold in the 1960’s as part of our foreign exchange reserves. But Ottawa has long forsaken the notion that gold can be a useful diversification tool for a country’s monetary interest. For decades Canada has been slowly selling off its gold reserves, and according to the Finance Department, it only has 77 ounces of gold coins remaining today, which is worth about US $100,000. That’s nothing more than a rounding error compared to the US $80,000,000,000 of total foreign exchange reserves we have.
As Canada gets out of the gold game, others are buying more. According to the World Gold Council, central banks around the world added a net of 336 tons to their reserves in the second half of 2015, representing a 25% increase from the previous year. Russia and India have increased their holdings. And since the start of this century China has bolstered its gold reserves by 350% from 400 tons in 2000 to nearly 1,800 tons today. Even individual investors have helped take gold off the Bank of Canada’s hands. A couple years ago I blogged about buying a 1 ounce limited edition gold coin for CAD $1,389. It’s easily worth 20% more today given the current spot price of gold. 🙂
Here’s a look at the biggest holders of gold by country. (source)
Based on the chart above, we can see that the U.S. central bank holds the most gold by a wide margin. The 8,133 tons of gold held by the U.S. make up 72% of its foreign exchange reserves. The next 3 countries in the list, Germany, Italy, and France also holds more than half of their reserves in gold.
It’s interesting how other central banks seem to be holding or even increasing their gold reserves while Canada has done the exact opposite, lol. I’ll write about the possible reasoning behind these two diverging ideologies around gold in a future post, but it has to do with the nature and purpose of Foreign Exchange Reserves, which requires a rather lengthy explanation.
Gold vs Silver
Both gold had silver have returned double digits in US dollars since the beginning of the year, unlike the U.S. stock market which has lost value year to date. But this is a natural cycle. When stocks go down, gold is expected to feed off people’s fear and move up. I don’t give advice on what people should buy or sell. But if anyone is already thinking about picking up some precious metals and isn’t sure whether to invest in gold or silver, one useful resource I always look at is the gold/silver ratio. It’s the simple concept of dividing the current price of gold by that of silver. In other words, how many silver coins can be bought with one gold coin of the same weight. If we track this ratio over time we’ll get a chart like the following.
As we can see the ratio between gold and silver has fluctuated over the past 30 years, but for the most part (over 80% of the time) is contained within the 50 to 80 range. Basically if the ratio reaches the green line then it’s better to buy silver. And if the ratio drops down to the blue line then gold would be a better buy. I purchased 20 ounces of silver last week since silver is currently undervalued based on the graph.
Before anyone goes to buy physical gold or silver it’s always a good idea to ask “why.” If investing is the goal then have an exit strategy before getting into the commodity. Unlike stocks or bonds precious metals don’t pay dividends or interest. If you are a collector then consider buying coins rather than bars. I also don’t recommend holding too much of it. Personally I only maintain about 1% to 2% of my assets in precious metals.
I think a number of factors in the short term could lead precious metals to outperform stocks this year. Canada has been supplying tons of gold to buyers for decades but the country has finally run out of gold to sell. Moving forward there will be less gold supply in the market which should put upward pressure on the price. The U.S. election is a big uncertainty and many people, including non-Americans, are nervous about the real possibility of a Donald Trump administration in the White House. Global growth is slowing and some analysts predict the U.S. is headed soon for a recession. Negative interest rates in Europe and Japan also make gold more attractive for investors. As uncertainty continues to linger around the world I believe gold will continue to shine. 😀
Random Useless Fact:
New Zealand consumes the most ice cream per-capita in the world at 28 liters/person per year. The United States takes second place with 21 liters/person per year.
“Before anyone goes to buy physical gold or silver it’s always a good idea to ask “why.” ”
Problem is, most people buying physical metals will ask ‘Why?’, and then seek out answers which support their already made-up mind: confirmation bias.
The biggest driver of gold price is fear (as opposed to greed). Is physical gold and/or silver the best way to capture return on this fear?
You mention gold and silver being up double digits since the start of the year, that’s great. However, Smith & Wesson (SWHC), another fear-driven stock, is also up 13-25% this year…with greater liquidity and far less purchase premium.
Yes, great point. People tend to gravitate towards information they want to believe. I do this myself sometimes. SWHC has gone up a lot recently. Another way to cash in on public fear might be to short the stock market index, which usually requires caution so that potential losses can be limited.
Two things I have yet to dip my toes into investment-wise are precious metals and currencies. I just don’t have much time to start doing the research to keep on top of everything. It’s interesting to see different points of view on it tho!
It’s fun to see policy makers trying to undermine each others economies in the global currency war. I wonder how it will end for everybody.
Do we know who bought the gold? For every seller there must be a buyer. Is that public information? Be interesting to know. I disagree with Anon’s negative view on metals. I also have a diversified selection of ETF’s. My Oil sector one has gone in the crapper. Should I sell that off as a long term investor? No, they will once again rise. As long as metals is part of an overall strategy there is absolutely nothing wrong with owning some. If I lived in parts of the world where there was rampant inflation like Venezuela (720%) for example, and I had 10% of my wealth in gold prior, I would be pretty happy I protected some of my wealth by doing so… With the insane liberals with a plan to put the country far deeper in debt, it may well be gold/silver may come in handy down the road here as well. They have a different view of economics and metals and they frown on them as something that is in the way of making our currency stronger. Central bankers in general don’t always like consumer investors buying gold/silver, simply because It undermines their debt based strategies for… Read more »
Good question. I’d also like to know who Ottawa sold the gold to. I assume the gold was sold in the open markets so there’s has to be transaction records somewhere, but I don’t know if that’s publicly available or kept hush-hush for security reasons. Nicely said about investing in gold and oil for the long run. The more debt Trudeau puts the country in the more money Canada has to print. Precious metals are historically good at combating the effects of inflation.
@Paul: “I disagree with Anon’s negative view on metals. I also have a diversified selection of ETF’s. My Oil sector one has gone in the crapper. Should I sell that off as a long term investor? No, they will once again rise.” Seems you are confusing the oil COMMODITY with the oil COMPANY. “As long as metals is part of an overall strategy there is absolutely nothing wrong with owning some.” Agreed, if your overall strategy acknowledges the price of metals being fear driven (in Canada, the other main driver is exchange rate). Personally, I would never “invest” in precious metals, that is, hold them long-term. I do, however, take great advantage of trading the fear (and, unfortunately, the misinformation). “With the insane liberals with a plan to put the country far deeper in debt, it may well be gold/silver may come in handy down the road here as well. They have a different view of economics and metals and they frown on them as something that is in the way of making our currency stronger.” Forming a personal financial plan around a political viewpoint isn’t a great strategy. But each to their own. @Liquid Independence: “The more debt Trudeau… Read more »