It may be a new year, but old habits still die hard.
The release of the Fed’s December meeting minutes has continued the market’s fixation on inflation and interest rates. It seems that Powell and his colleagues are stubborn in their fight to beat down inflation.
That is hardly surprising given the rhetoric up to this point, but it is ironic given how stubborn the Fed was two years ago when it insisted inflation was transitory. Hopefully, they know when to give up their pride this time around.
But inflation and interest rate chatter aren’t what I want to discuss today.
I simply wanted to highlight the fact markets are looking for direction early in the new year. And while monetary policy is certainly important in that regard, it is what Central Banks are buying, not peddling, that I believe is more pertinent.
Let me explain…
Gold rush
In 2022, Central Banks purchased the most gold seen since 1967. That was back when Bretton Woods was still a thing, and they had to hold gold too.
Take a look at the following chart to see the huge spike in bullion hoarding:
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| Source: World Economic Forum |
Now, as some observers have commented, this record gold buying has undoubtedly been influenced by the performance of bonds. As Financial Times reported in October:
‘Toby Nangle estimates the Bank of England’s losses alone are currently around £200bn, and the Federal Reserve says it had notched up almost $720bn of unrealised losses by the end of the second quarter.’
Stockpiling some extra gold could, therefore, help buffer any liquidity problem that may arise. Because while it is unlikely that an institution that can literally print money out of thin air will go bankrupt, the process itself has deep, long-term implications for the value of fiat currency.
That’s why, as one ZeroHedge article implies, this gold hoarding may be less about preparing for a monetary policy meltdown and focus more on the push for central bank digital currencies (CBDCs). After all, love or hate the idea, a CBDC would give central bankers even more direct control over how you spend and save:
‘Central banks have been talking about the idea of issuing a digital currency, which would completely change the way money works today.
‘By issuing a digital currency directly into a citizen’s account at the central bank, the financial institution would have all access to savers’ information and, more importantly, would be able to accelerate the transmission mechanism of monetary policy by eliminating the channels that prevent higher inflation from happening: the banking channel and the backstop of credit demand.
‘In such an environment, gold’s status as a reserve of value would be unequalled.’
More control, more money, more power
If you’ve been following our thoughts on CBDC, you’ll know that we’re not particularly fond of the idea.
It is a bastardised version of the cryptocurrency ethos. One that takes the core concept of decentralisation and instead makes it hyper-centralised.
In other words, the central banks would hold all the power, and everyday people would suffer the results. That’s why owning at least some alternative assets, whether it be gold or real cryptocurrencies, is an important investment.
Everyone should at least be slightly diversified in case the worst does happen.
Because even if the central bankers manage to deliver a benevolent CBDC system, it’s them being able to seize control at the snap of their fingers. That’s terrifying. No person or entity should have that much control over your wealth, but they certainly want it.
So, if you’re looking for a good early investment for 2023, consider alternative assets.
Gold and crypto are the big games in town, and whatever the central banks do, it is unlikely they’re going away anytime soon.
Regards,
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Ryan Clarkson-Ledward,
Editor, Money Morning
