Gold’s Historic Role as Money and Insurance Playing Out in Emerging Markets
Gold has been used as money and a store of wealth for thousands of years. Having a stash of gold was useful as some of it could be used to buy necessities and the remainder could be held as a store of value. While gold no longer serves as a means of exchange in everyday transactions, it is still held and stockpiled by nations and individuals to preserve wealth and to call up in times of financial emergency.
Recently, we have seen emerging market countries cash in their gold insurance policies to stave off financial calamity and gold is showing that it may also be used to directly settle transactions.
About 18 months ago, Turkey began to add gold to its central and other banks in the country. The President of Turkey Recep Tayyip Erdoğan urged his citizens last year to buy gold. Over the past two months, the Turkish Lira collapsed causing financial stress. In response, in order to support the Lira, the Turkish Central Bank raised interest rates, required certain contracts to be denominated in Lira and urged citizens to sell their gold and dollars and buy Lira.
Turkish banks and lenders recently sold about $4.5 billion in gold in order to buttress their financial statements and pay down debt.
As recently of 2015, Venezuela had a large gold hoard of nearly 400 tons of gold. Since 2015, however, Venezuela has been steadily selling its gold to repay its outstanding debts. As of September 2018, according to the World Gold Council, Venezuela’s gold reserves had fallen to 167 tons. Venezuela has been attempting to replenish its gold reserves by tapping its domestic mines.
In July of 2018, it was reported that Venezuela exported nearly $800 worth of it gold (about 20 tons) to Turkey either in exchange for goods and services or for safekeeping.
Bloomberg reported earlier this month that Metallon Corp a gold mining concern in Zimbabwe, is considering using gold to pay for it mining equipment due to a cash shortage in Zimbabwe. Zimbabwe’s currency was weakened so significantly due to hyper inflation about ten years ago, that it ceased to be used widely, creating a cash shortage. A variety of foreign currencies, including the U.S. Dollar and Chinese Yuan are used in Zimbabwe.
Metallon Corp’s consideration of using gold to pay its equipment suppliers indicates that gold can once again be used as a transactional currency in circumstances where there is either an untrusted local currency or a local or alternative currency shortage.
India, while not in economic crisis, has seen its currency the Rupee fall to all time lows vs. the dollar. Since the price of gold is priced in U.S. Dollars gold has become more expensive when denominated in Indian Rupees. An ounce of gold in India in mid-September 2018 was about 87,000 Rupees, about the same price as an ounce of gold in the spring of 2011 when the price of gold hit an all-time high of $1911 in U.S. dollars (as of September 2018 the price of gold in U.S. dollars is about $1300).
The increase in the price in gold when priced in Rupees may make it not feasible for Indians to continue to purchase gold at the near record pace they have been buying in recent months.
The Time to Buy Gold is Before Financial Crisis Hits
As seen above, having gold in Turkey, Venezuela, Zimbabwe, India or any country subject to a local currency devaluation, provided insurance against such a decrease in value of the local currency. The time to acquire gold is before such a devaluation occurs. One cannot time when, if ever, one’s local currency may be struck with a devaluation. The recent emerging market examples, however, show that it is prudent to hold gold in advance of a devaluation of your currency and/or sudden increase in inflation in your country.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.