Once the banking capital of the world, Switzerland now sports a negative .75% interest rate, thereby wrestling the “Race to the Bottom” title away from the perennial leader, Japan. In an effort to counter China’s currency devaluation attempts, America has unwittingly unleashed an interest rate race to the bottom. By weakening the dollar against other currencies, those other currencies also tend to lose value in the process. These developments bode well for gold, which has a long history of maintaining and even increasing in value during times of currency devaluation, market volatility, and any type of global macroeconomic uncertainty.
Global central banks have been buying gold and at fire-sale prices for quite some time. All the while, these central banks have been badmouthing gold generally and to common investors, in particular. But for an intelligent investor, it’s a clear case of do as I do, not as I say. Investor interest in gold causes an increase in demand and prices, which does not benefit any central bank’s desire for a continuing gold buying spree on the cheap. China scooped up another 10 metric tons just in July alone. Considering that China is the world’s largest producer of gold, to begin with, it’s difficult to accurately assign the country any dependable ownership amount, but they have made no secret of their current and heavy gold buying spree, which is entering its ninth consecutive month.
Meanwhile, China has been successfully devaluing their currency, in an effort to offset U.S. tariffs and make their currency more attractive, transparent, and accommodating to the global community. The Trump Administration does not want a “strong” dollar at this time for the same reasons. However, because global trade in gold is dominated in U.S. dollars, a weaker dollar tends to increase the value of gold. As central banks wrestle with projections of a growing worldwide recession, they will continue to buy gold, continue to reduce interest rates and continue to boost money supply in the global economy, in order to provide an impetus to growth.
A greater number of emerging market countries are joining the gold buying frenzy, generally due to the higher economic risks found in reserve currencies. With so much attention focused on the international monetary system, China is making a concerted effort to display an international appeal for their currency, the Chinese yuan. In a recent World Gold Council report, it was reported that about 40% of emerging market and developing economy central banks cited “anticipated changes in the international monetary system being relevant to their decision to hold gold.” With the growing popularity of blockchain-based monetary systems and increasing concerns over U.S. stewardship of the premier global reserve currency, greater pressure and potential value is being placed on gold and other physical precious metals. Prices and demand continue to increase, but according to analysts top-end limits to the current precious metals rally are also continuing to increase.
Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.