24/7 Wall St. looked at the latest report from the World Gold Council and it is now more obvious than ever that gold is becoming the new global reserve currency. Continuous and aggressive central bank actions from the United States and Europe are driving the demand for gold. Investors have not yet seen any of the real hyperinflationary pressures that seem likely down the road.
Gold's substantial rise in price should speak for itself. In dollar terms, gold returned 11.1% in the third quarter and was up by 16% year to date through the end of the quarter. The World Gold Council said that gold has a low stock market correlation through time. That was not the case in the third quarter. Gold still outperformed almost all the major equity markets in the largest gold-holding nations in 2012.
24/7 Wall St. analyzed how the gold rankings compare to each major nation's gross domestic product (GDP) and how those figures compare to the top 10 holders of gold. What is surprising in some cases is how countries with the largest GDP are not necessarily the largest holders of gold. Two small nations, the Netherlands and Switzerland, are major holders of gold. Under the terms of the Central Bank Gold Agreement among major European states, many countries are supposed to be selling gold but are not.
The United Kingdom's $2.43 trillion in GDP is the world's seventh largest, but its gold holdings of 310.3 tonnes rank only 17th in the world and account for only 15.9% of its total foreign reserves. Does the old term "pound sterling" mean that the British banks really care more about silver? Another standout exception is Brazil, which has tiny gold reserves compared to its GDP. Its $2.5 trillion in GDP ranks sixth in the world, yet it holds only 33.6 tonnes of gold, or 0.5% of foreign reserves. Brazil ranks a surprising 52nd in the world among gold holders.
The International Monetary Fund is the third-largest official holder of gold, with more than 2,814 tonnes. The European Central Bank ranks right behind India, with 502.1 tonnes and 32.3% of its total foreign reserves held in gold. Central bank buying of gold was recently undertaken by Russia, Turkey, Ukraine and the Kyrgyz Republic. Turkey went as far as raising the gold reserve requirements for its commercial banks.
The World Gold Council report shows low borrowing costs and the support of financial markets spur gold accumulation. Gold is no longer just an inflation hedge; it is the key protection against a global race to devalue currencies, even if consumer prices are somewhat stable. Bonds pay historically low rates and stock market volatility has spooked many investors, so gold is becoming the true safe haven.
Major central banks are growing their balance sheets by purchasing trillions of dollars in paper assets. The World Gold Council said that research showed that a 1% change in money supply, six months prior, in the United States, Europe, India and Turkey tends to increase the price of gold by 0.9%, 0.5%, 0.7% and 0.05%, respectively. The Council also said that inflation is still several years off and many central banks have been more worried about deflation. Investors would be well advised to heed a warning from bond king Bill Gross, who told global investors to have exposure to hard assets, which will rise in value with inflation.
24/7 Wall St. has listed the 10 nations with the largest gold reserves, along with the percentage of total foreign reserves held in gold, each nation's 2011 GDP and how it ranks in the world, and the local stock market performance. We have added analysis about how the potential unraveling of the euro could play into the future buying or selling of gold by European nations. For nations outside Europe, we have provided some historical context and predicted the path that their central banks are likely to follow in the years ahead.
> Gold reserves: 557.7 tonnes
> Pct. of total foreign reserves: 10.0%
> GDP: $1.82 trillion (10th highest)
> Stock performance: Bombay BSE up 7.6% in Q3, up 21% YTD
While India ranks 11th on the World Gold Council list, it is 10th if you remove the International Monetary Fund. India has been a steady buyer of gold over time. That is likely to continue as the government needs to support its currency, even if the economy is volatile. India became an aggressive buyer in 2009, when it spent almost $7 billion to buy 200 tonnes of gold, which the IMF sold to raise capital. For the economy to support 1.2 billion people, the central bank must hold gold and hard assets. The Indian population is a large consumer of gold for jewelry and there is high demand for the precious metal to store wealth. India will thus continue to buy gold in the years ahead.
> Gold reserves: 612.5 tonnes
> Pct. of total foreign reserves: 59.8%
> GDP: $838 billion (17th highest)
> Stock performance: AEX up 5.1% in Q3, up 3.4% YTD
It is surprising that the Netherlands has so much gold. But it is also important to recall that the country is a former colonial power and has a long history as a very wealthy nation. Its population of 16.7 million ranks 63rd among all nations, while its GDP is the 17th largest in the world. As with some European nations, the Netherlands did not sell all the gold provided for by the Central Bank Gold Agreement. Now that the Netherlands is under some of the same pressure as many other European nations, it is unlikely to be a big seller of gold. It may need that gold to protect itself if the euro comes unraveled.
> Gold reserves: 765.2 tonnes
> Pct. of total foreign reserves: 3.2%
> GDP: $5.86 trillion (3rd highest)
> Stock performance: Nikkei 225 fell 1.5% in Q3, up 4.6% YTD
Japan has to hold large amounts of gold. The Bank of Japan has held interest rates at almost zero for about two decades. It recently sold gold so that it could pump about $200 billion worth of yen into the economy as stimulus after the tsunami and nuclear disaster threatened to send Japan back into recession. At some point in the future, Japan may need to buy that gold back to support its large monetary base. Until then, the yen remains one of the stronger global currencies, which makes exports more expensive. Japan's population of 127 million is aging rapidly and birth rates are extremely low.
> Gold reserves: 936.7 tonnes
> Pct. of total foreign reserves: 9.6%
> GDP: $1.85 trillion (9th highest)
> Stock performance: MICEX down near 4% in Q3, negative YTD
Russia continues to buy gold as its global economic ambitions grow. A previous 24/7 Wall St. analysis showed that Russia's reserves were 784 tonnes in early 2011 after it bought 120 tonnes in the first 10 months of 2010, more than 100 tonnes in 2009 and close to 70 tonnes in 2007. The World Gold Council reported that Russia has added more gold, so that reserves likely will rise yet again. Russia is extremely wealthy in natural resources, and president Vladimir Putin and his allies want it to become more of an economic superpower. With a population of 142 million and Russia's GDP of $1.85 trillion, its holdings of gold are likely to surge.
> Gold reserves: 1,040.1 tonnes
> Pct. of total foreign reserves: 11.5%
> GDP: $660 billion (19th highest)
> Stock performance: Swiss Market up 7% in Q3, up 9.4% YTD
Switzerland is the world's private banker and so must be a top holder of gold. Still, it is amazing to consider that its population is barely 7.9 million and it ranks 95th in the world for population. Also, its dollar-adjusted GDP of $660 billion ranks only 19th. Switzerland sold gold from 2003 to 2008, right before the huge run up in gold prices. If Switzerland needs to devalue its currency to remain competitive, it can always sell more gold. Unless global banking disappears entirely, the Swiss will remain one of the largest holders of gold in the generations ahead.
> Gold reserves: 1,054.1 tonnes
> Pct. of total foreign reserves: 1.7%
> GDP: $7.3 trillion (2nd largest)
> Stock performance: Shanghai Composite 6.6% lower in Q3, 5.4% lower YTD
China's economy has stumbled to the point that its official growth rate of 7.4% in the third quarter may feel like a recession. China has the ambition of becoming the largest economy in the world. It already is considered the world's manufacturer. China must have hard assets along with its U.S. Treasury bond holdings to keep its currency pegged to the U.S. dollar. It has the world's largest population, with more than 1.3 billion people, yet its GDP of almost $7.3 trillion is still not even half that of the United States. Whenever the yuan truly floats, China will have to have more hard assets and more transparent economic readings to support it. China added some 454 tonnes of gold between 2003 and 2009. When it finally adjusts its official gold holdings in the coming months, they are likely to be higher again.
> Gold reserves: 2,435.4 tonnes
> Pct. of total foreign reserves: 71.6%
> GDP: $2.77 trillion (5th largest)
> Stock performance: CAC rose 4.9% in Q3, up 6.1% YTD
France finds itself in an interesting position. Socialist president Francois Hollande is on a quest against many of the austerity measures implemented by his predecessor, Nicolas Sarkozy. France does not want to lose its "second-best economy" status in the eurozone, behind Germany. It will have to pay for the new economic measures and this poses a particular problem because the extremely wealthy, who are being targeted for high taxes, may continue to leave the country. France may ultimately need to sell gold. Although it is part of the Central Bank Gold Agreement as a gold seller, it may need a cushion in case the euro faces an outright breakup.
> Gold reserves: 2,451.8 tonnes
> Pct. of total foreign reserves: 72.0%
> GDP: $2.2 trillion (8th largest)
> Stock performance: Borsa Italiana MIB rose 5.7% in Q3, flat YTD
Italy is a financially troubled nation, and it is truly too big to bail out. By many measures it is the greatest economic risk to the rest of Europe and the balance of the major world economies. Italy's 61 million population ranks 23rd in the world, but its dollar-adjusted GDP of almost $2.2 trillion ranks it as the 8th largest economy. The Italian government was also part of the Central Bank Gold Agreement, but there is a real conundrum now. Italy could sell gold to raise capital, but then it would lose its cushion if the euro unravels. It is almost impossible to imagine that Italy would be a buyer of gold because it has too many pensioners and benefits to pay for as is.
> Gold reserves: 3,395.5 tonnes
> Pct. of total foreign reserves: 72.4% of foreign reserves
> GDP: $3.6 trillion (4th largest)
> Stock performance: DAX rose 12.4% in Q3, up 22.3% YTD
Despite forced gold sales from ECB nations in the past, Germany likely has to maintain its underlying asset base as it is the anchor of the euro. The euro after all, is a watered-down version of the Deutsche mark. Germany's population of 81 million ranks 16th in the world, but its $3.6 trillion adjusted GDP ranks fourth. What could happen if Germany started accelerated gold sales to buy up even more paper assets from the PIIGS (Portugal, Italy, Ireland, Greece and Spain) and more paper assets of their banks? The initial reaction might be positive for the eurozone economies. However, Angela Merkel and her successors might be left with high inflation without hard assets as a cushion. Germany is supposed to be a gold seller under the Central Bank Gold Agreement, but it is likely to hold what it can as a buffer in case the euro breaks up or in case it needs to raise quick bailout cash for the PIIGS.
1) United States
> Gold reserves: 8,133.5 tonnes
> Pct. of total foreign reserves: 75.4%
> GDP: $15 trillion in GDP (the largest)
> Stock performance: S&P 500 up 5.7% in Q3, up 14.5% YTD
It should be no surprise that the U.S. is the largest holder of gold as the dollar is the global reserve currency and the U.S. has by far the largest GDP of any nation. The growth of the Federal Reserve's balance sheet can only be sustained without dire consequences if it is backed by hard assets like gold. Imagine if the conspiracy theorists are right and that Fort Knox and other repositories do not have gold in them. It is this gold, the massive U.S. GDP and America's underlying wealth of natural resources that keep the dollar as the world's reserve currency. If the World Gold Council is right in its assessments of inflation and gold, then the U.S. is likely to hold its reserve currency status for quite some time, even if credit rating agencies continue to downgrade the country.
JON C. OGG