November 24, 2022
  • November 24, 2022

Gold starts slowly as central banks turn to digital currencies

By on May 1, 2021 0

Some major changes may soon be made at a central bank near you, with around 90% of them at some point in the development of a central bank digital currency, or CBDC. In October 2020, the Bahamas became the first economy to introduce its own CBDC, the Sand Dollar, but many more national currencies are expected to roll out in the coming years.

I have a lot more to say on this, but first let’s take stock of official gold purchases. Since 2010, central banks have been net buyers of the gold as they seek to mitigate risk and hedge against their own monetary decisions.

However, 2021 is off to a bad start in terms of official purchases. Central banks were net sellers in January and February for the first time in more than a decade, unloading some 16.7 metric tons, according to the World Gold Council (WGC). This has contributed to gold’s poor performance so far this year, down 6.5% until last Friday. Turkey was the biggest seller, dumping 11.7 tonnes in February alone.

Click to enlarge

Not all central banks were sellers. India bought 11.2 tons in February, Uzbekistan 7.2 tons. Serbia has been accumulating gold every month since February 2019.

Magyar Nemzeti Bank (MNB), Hungary’s central bank, announced earlier this month that it tripled its holdings from 31.5 tonnes to 94.5 tonnes, place Hungary first among Central and Eastern European Countries (CEECs) in terms of gold reserves per capita.

“Because it carries no credit or counterparty risk, gold helps restore confidence in a country in all economic environments, making it still one of the most critical reserve assets in the world,” the bank wrote in a press release.

China allows large imports of gold

When it comes to gold policy, however, the big news is that China now allows domestic and international banks to import large amounts of precious metal in the country in an effort to support prices. According to Reuters reports, around 150 metric tons worth $ 8.5 billion will be shipped to China as early as this month or next.

For comparison, in 2019, China imported around 75 tons per month, or $ 3.5 billion.

The country is already the world’s largest importer of metal, so this is an important development which I think could help the price of gold to remain dynamic.

Old meets new: will cash go digital?

In addition to owning gold – one of the oldest known assets, having been mined for more than 5,000 years – many central banks are now on the right track to introduce their own digital currencies, which our ancestors did could never have conceived.

It is believed that more than 60 central banks are currently exploring the idea of ​​CBDCs, including retail tokens that would be used by citizens as well as wholesale applications for financial institutions.

But first, what is a CBDC, and is not he?

Simply put, CBDCs are digital payment instruments that, like traditional fiat money, are issued by a central bank and denominated in the national unit of account. The hope is that they will allow safe and secure transactions and provide a transparent audit trail while providing a level of confidentiality.

Another advantage? No more breaking bills. Many people avoided using dirty paper money during the pandemic, but in the past Americans would lose some $ 62 million annually in free currency.

For now, CBDCs appear to be designed not to replace traditional cash but to complement it. Nor do they appear to threaten the growing popularity of cryptocurrencies such as Bitcoin, the price of which is far too volatile to be used as a daily medium of exchange. Earlier this month, Federal Reserve Bank of Dallas Chairman Robert Kaplan called Bitcoin a “store of value,” like gold, rather than a currency.

That said, many merchants are now accepting Bitcoin as a form of payment, perhaps the most notable being Tesla. Visa and PayPal already allow customers use cryptos to settle transactions, and last week PayPal-owned Venmo said it would enable crypto trading. Miami Mayor Francis Suarez wants to allow residents to pay their taxes in Bitcoin.

Some central banks are ahead of others in launching a CBDC. Like I said, the Bahamas has the Sand Dollar, while Cambodia has the Bakong. Gold-loving China has reportedly been working on a digital yuan since 2014, and recently distributed for millions of dollars of prototype currency to residents of Shenzhen and other cities to take a test drive. Meanwhile, the British Treasury and the Bank of England (BOE) announced last week that a task force has been created to examine what certain people are. calling it “britcoin”.

No inflation?  Corn prices rise Alomst doubled
Click to enlarge

No money, no problem

The transition to digital currencies is easier when the country is already accustomed to preferring online payments over paper money. Take Sweden and Norway, two of the most cashless companies. The two Nordic countries are currently working on their own CBDCs.

As some of you may know, Sweden was the first country in the world, in 1666, to issue paper money. Today, it is set to become one of the first to introduce a digital token, the e-krona, perhaps as early as November 2022. The move follows years of declining banknotes and coins in circulation in the Swedish economy. It is estimated that only around 6% of transactions are made with physical cash.

Quantity of physical banknotes and coins circulating in Sweden at a minimum of several decades
Click to enlarge

In neighboring Norway, this figure is even lower, between 3% and 4%. In one Press release published last Thursday, the Norges Bank announces its intention to “test technical solutions for a central bank digital currency (CBDC) over the next two years”.

Bitcoin Dominance Drops, opening the door to other cryptos

Again, CBDCs shouldn’t compete with cryptos like Bitcoin, which takes its place as a tradable asset like gold.

The world’s largest cryptocurrency is nowhere near its all-time high, after falling below $ 50,000 last Friday for the first time since early March in response to news that President Joe Biden is expected to propose a hike of capital gains tax at 43.4. %. Investors clearly had feelings on the proposal: stocks fell nearly 1% last Thursday.

Bitcoin dominance drops to 50% for the first time in three years
Click to enlarge

Either way, Bitcoin’s weakness could very well be a boon to other cryptos. For the first time in three years, its market capitalization as a percentage of the total cryptocurrency ecosystem dropped to 50% last week as its price slipped. When this has happened in the past, according to Cointelegraph, other coins have moved to take over, with gains being led by Ether. Indeed, Ether hit a new all-time high of $ 2,583 last week as analysts forecast further progress on an expected drop in supply.

Originally published by US Funds, 04/26/21

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be suitable for all investors. By clicking on the link (s) above, you will be taken to one or more third party websites. US Global Investors does not endorse all of the information provided by this website (s) and is not responsible for its / their content. Beta is a measure of the volatility, or systematic risk, of a security or portfolio relative to the market as a whole.

Holdings may change daily. Holdings are reported at the end of the most recent quarter. The following securities mentioned in the article were held by one or more accounts managed by US Global Investors as of (03/31/2021): Tesla Inc., Visa Inc.