If gold isn’t money, why do Central Banks hold so much of it?

bank of England, the British central bank.

Investors hear the same narrative time and time again: Gold isn’t money.

We’re told that in today’s global, digital marketplace, gold no longer has a place or a role to play. This narrative sounds reasonable. After all, we live in an age where we do our banking online and can even pay for our groceries with a tap of our smartphones.

Nobody pays for anything with gold coins. Gold feels like something that was relevant a century ago, but has nothing to do with the world’s monetary system today.

Plus, the Gold Standard finally drew its last breath back in 1971. Bye-bye gold.

Or so the story goes.

In fact, this narrative is simply a mind game. It’s manipulation.

As soon as you stop listening to the story and actually look around, you see a very different story unfolding. Particularly when you look at the world’s central banks.

Let’s take a peek at how much gold bullion is held and stored by central banks around the world, in tons.

#1: U.S. – 8,134
#2: Germany – 3,381
#3: IMF – 2,814
#4: Italy – 2,452
#5: France – 2,436
#6: China – 1,709
#7: Russia – 1,352

Source: World Gold Council

Other central banks increasing their gold holdings include those in the United Arab Emirates, Ukraine, Malaysia, Kazakhstan, Jordan and Belarus.

We could soon see Russia and China rising higher on the list, as they are both buying gold like there’s no tomorrow.

China’s gold reserves have risen by more than 50% since 2009, and are probably already higher than the 1,709 tons they have declared. Over the same period, Russia added even more gold to its reserves than China.

All this begs the question: If gold isn’t money, and if it’s irrelevant to today’s global financial system, why do central banks hold so much of it? And why are they increasing their holdings?

The simple answer is that each country is protecting its own currency.

In the case of China and Russia, they are building reserves in advance of trying to break the U.S. dollar hegemony as the world’s reserve currency.

Regardless, nations around the world clearly see gold as an integral part of the financial system. In fact, there is a shadow Gold Standard at play here. It’s not formal, as it once was. No currencies are pegged to a fixed price for gold. But gold reserves are still seen as being the way to credibly support the real value of your currency.

Maybe it’s the ongoing abstraction of money that drives the desire to hedge it with something real and tangible, like gold.

Money is digital these days. Cash is on the way out. Our money is simply made of bits and bytes on computer servers in the cloud. Central banks know this, and are using gold bullion as a way to protect abstract money with something real.

As for you and me, we should follow the same path.

Our money, our investments and our savings all exist as abstract money, stored on the same servers. We would do well to do some hedging for ourselves, and protect our wealth by holding a proportion of it in the form of real, tangible, portable and liquid money.

In other words, follow the central banks’ example and buy more gold.

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Further reading:

6 Good reasons to own gold coins or gold bars.

Storing gold – at home, in a safety deposit box, or with your dealer.

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