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Gold is being taken more seriously as a legitimate form of money as currencies flail and prices hit new records.
Gold’s last gasp of monetary fame came between World War II and 1971, when the world pegged their currencies to the U.S. dollar and the dollar was fixed to gold at $35 an ounce. This wasn’t a pure gold standard but it forced some kind of fiscal discipline into monetary systems. President Nixon abandoned this standard in 1971 so the U.S. could have more cash to fight the Vietnam War.
Although gold bugs still loved the metal, pushing prices to a then-high of $850 an ounce by 1980, the gold fever didn’t hit the mainstream for almost 40 years … until now.
Gold is a safe haven asset, a trade and a store of wealth but it can also be considered a currency and that theory is gaining steam. Here are three of the primary factors behind golds rising legitimacy.
3. Central Banks Are Now Buyers, Not Seller
Central banks have become net buyers of gold instead of net sellers. Once dumping gold and buying currencies, the central banks are now changing strategies to include gold.
“There has been a fundamental shift in the behavior of central banks over the past few quarters,” says Natalie Dempster, head of investment for the World Gold Council.
Since the second quarter of 2009, central banks from emerging market countries have transitioned into net buyers. One of the biggest buyers is China. Over the past five years, the country secretly increased its gold holdings from 600 tons to 1,054 tons. China currently holds only 1.6% of its reserves in gold.
Dempster says that if the continent were to reallocate its holdings to 3%, it would need to buy 1,000 tons of gold. Compare this with the U.S. and Portugal, which hold 70% and 80% of their reserves in gold, respectively. Although if the gold price rises rapidly then China could get the same diversification without buying 1,000 tons, but the amount would still be substantial.
“Some banks,” says Dempster, “have been rebalancing as the percentage of gold in total reserves has fallen over time. Others are looking to diversify away from dollar-based assets, and with sovereign debt concerns continuing to grow around the world, gold’s attractiveness as a reserve asset that bears no credit risk continues to grow.”