Central Banks Are Buying Gold at Record Rates…

Do as I say—not as I do!

I always hated that parental dictum. It always seemed condescending; still does. Like someone saying, “Look, I can do it because I know what I’m doing, but you can’t do it because you don’t know what you’re doing!”

Whenever that phrase was tossed my way, I was quick with a pre-planned reply (that got me into trouble more than once): What’s good for the goose, is good for the gander.

The tone in my voice was this: If you can do it, I can do it. So, stick that in your pipe and smoke it.

Like I said, that reply got me into trouble more than once.

So be it.

Because to this day I still believe that “do as I say—not as I do” is among the most stupid things anyone can say.

And in today’s dispatch, the “do as I say” topic is gold.

For the last umpteen years—and I mean going back at least into the 1990s—all I’ve heard from financial mandarins and what are supposedly America’s economic and investment thought-leaders is that gold is an archaic rock that possesses no functional use case.

Jason Zweig, a financial writer at my old stomping grounds, The Wall Street Journal, once called gold a “pet rock” and said this of gold, when it was at $1,150 per ounce:

When you are in the grip of cognitive dissonance, anything that could be regarded as evidence that you might be wrong becomes proof that you must be right… You don’t want to be one of these people, spending years telling reality that it is wrong. There is a case to be made for owning gold, but it speaks in a whisper, not in the shouts of doomsday so customary among gold bugs.

Couldn’t have said it better myself. Cognitive dissonance. And you don’t want to be one of those people telling reality that it’s wrong.

Again, I will note that gold was $1,150 per ounce when those words appeared. Gold today is nearly $2,700.

Oh, by the way, what cost $1 in 2015 now costs $1.32.

So gold’s purchasing power is up 135% while the dollar’s purchasing power dived.

You definitely do not want to be one of those people!

But back to the “do as I say” argument…

Riddle me this: Why is gold now the #2 reserve asset among central banks around the world?

Cognitive dissonance?

Are central bankers collectively sheep who’ve bought into this gold delusion?

Or do they know something/fear something?

It used to be that the US dollar accounted for more than 70% of central bank reserves globally back in 2002. Gold was pretty much nowhere in the mix back then.

Today, the dollar is 58% of central bank reserves and gold is 16%.

Sure, the dollar is still well ahead of gold, but demand for the greenback is clearly in decline, a trend that will culminate in enormous repercussions on American pocketbooks.

Most of the central bank gold buying is happening among banks in the eastern hemisphere, so basically Asia, the Middle East, and Africa. Most of Europe is in there too, and lots of Central and Eastern European central banks are big buyers of gold in recent years.

Which brings me back to the beginning: What’s good for the goose is good for the gander… meaning that if (non-US) central banks are aggressively accumulating gold at an historically fast pace, why is gold an archaic rock I should keep out of my portfolio?

Or is it, just maybe, that I actually should be adding gold to my portfolio so that I can protect my purchasing power from the same worries that (non-US) central banks see?

Hmmm….

A lot of American economists, and financial writers, and portfolio folks like to dismiss gold in a portfolio by claiming that gold does nothing. Just sits there. Doesn’t earn a lick of interest.

Very true.

Then again… remind me about the dollar and how it earns negative interest in the form of inflation and purposeful value destruction at the hands of the Federal Reserve?

The Fed itself tells us all the time that it wants at least 2% inflation. Supposedly that is a Goldilocks number—not too hot, not too cold. Juuuust right… for helping Uncle Sam manage his extreme debts on the backs of the American consumer.

Inflation erodes the value of today’s currency, making it easier for government to repay its vast debts with tomorrow’s cheaper dollars. But at the same time, it’s now harder for consumers to pay tomorrow’s increased grocery store costs with those same cheaper dollars.

So the simple question is this: Is it better to own an asset that earns zero interest, or one that earns negative interest that ensures your purchasing power is guaranteed to erode?

That’s an obvious answer.

The reason (non-US) central banks are stockpiling gold is because they see a crisis in the offing. They know the dollar’s days as king of the currency hill are numbered. They know US debt is a timebomb with an unstoppable fuse.

They’re not suffering from cognitive dissonance.

On the contrary, they’re demonstrating cognitive consonance—a congruence in their behavior. Their actions match their belief system, and it’s a belief system built on readily seen, easily observable facts about the state of Western currencies (mainly the dollar) and Western debts (mainly America’s).

I guess what I am saying is this: Do as I say—and as I do.

Buy more gold… before the goose hits the fan.