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Why are Central Banks buying Gold? Pax Americana is dead.

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by VBL
Saturday, Apr 29, 2023 - 22:24

Gold didn’t invade Ukraine. Gold didn’t take Russia’s reserves. Gold isn’t the problem, It’s the solution

Sections:

  1. Hedge Against Fiat Debasement
  2. If You Can’t Touch It, Is it Really Yours?
  3. No Going Back Now
  4. Focusing on the Swift side
  5. The West Stole From Russia
  6. Gold Solves Problems
  7. The SOV Problem Solved
  8. The MOE Problem is Harder
  9. Golden Guaranteed Fiat Multipolarity
  10. This Didn’t Happen Overnight
  11. Bottom Line
  12. Appendix:The Multipolarity Partnership

TL; DR

Summary: People worry about risk of debasement. Nations worry about outright theft. Gold and good accounting hedges both. (2200 words)
 

Hedge Against Fiat Debasement

Authored by Goldfix, ZH Edit

Most of us already understand the obvious case for Gold given games played by governments to inflate currency and decrease debt-service costs.1

World governments have accepted and dealt with debasement/inflation risk since the Second World War ended and the USD became its global reserve currency (GRC); First, as MOE, then as Global SOV after 19712

Consider that post 1971 when the US went off the gold standard, no nation went off the dollar standard seemingly until this year. There certainly were inflationary problems between then and now. But those problems subsided as trust in Pax Americana grew and international trade blossomed. So what changed all of the sudden?

Listen: Nixon said he was suspending the Gold window to “defend the dollar”, but what was he really protecting?

What started all this global dedollarization talk? Risk of sovereign wealth theft entered the picture in the eyes of many. That is what changed. Any nation’s money can be confiscated (stolen) now.

 

If You Can’t Touch It, Is it Really Yours?

Due to the sanctions and confiscation of Russia’s reserves, nations now need a way to ensure their own sovereign wealth will not be similarly (in their eyes) stolen from. Right or wrong, this is an existential risk they cannot ignore.

Before continuing: Let’s quickly address the What if we gave it back and Russia left Ukraine idea some have put forth as a solution to the current crisis. Here’s why that would not fix things…

No Going Back Now

If Russia left Ukraine, fixed it, and apologized for the invasion, it wouldn’t matter; the trust is gone. Doubtful any neighbor of Russia would trust them to *not* invade even if they left Ukraine.
Similarly, even if the West gave Russia back all its money, reinstated its ability to transact on Swift and said we’re sorry, we don’t think Russia would return.

Focusing on the Swift side

The G7 used Swift as a weapon in retaliation for Russia’s invasion of Ukraine. Therefore to the non-G7 world, weaponizing Swift—a network which was supposed to merely be an agnostic plumbing device— and the subsequent *confiscation* of Russian wealth3, have forced BRICs (and G7s as well) to seek protection of that happening to any of them in the future. What was done to Russia, a nuclear power, can be done to any of them, right? Swift was used once as a weapon, it can be used again. That Genie is out and about now.
The world had once believed the US and its associates would not violate the rule of international monetary law as they themselves saw it. Yet that happened anyway. In all fairness to the US, these violations were done to retaliate against a very real invasion of another country.
Nevertheless, a weaponized Swift was now at the US’s disposal to be used at theirs and the G7’s discretion. What was so different/bad about what was done to Russia via Swift?

 

The West Stole From Russia

Bretton Woods 2 crumbled when the G7 countries seized Russia’s foreign exchange reserves. Keeping money inside financial institutions like the IMF was considered risk free. That is clearly no longer the case.- Zoltan's Gold-mageddon

By de-platforming Russia from Swift via sanctions, two related but separate things were done. Prohibiting Russia’s Swift use for international trade effectively shut them out of dollar denominated trade. That is the first.

More importantly (to us) and less discussed in the West: International confiscation of Russia’s FX reserves was done. This confiscation of Russian assets (a nuclear nation with significant global trade ties4) have thus exploded BRIC perception of risks that were not viewed as material before. Specifically, if they can take Nuclear Russia’s money in the Swift system, they can take anyone’s.

Here’s how G7 politicians frame that concept in Aug 2022:

[Officials] have argued that [confiscating Russian bank reserves] could make nations reluctant to keep their reserves in dollars, for fear that in future conflicts the United States and its allies would confiscate the funds5

Translated: Officials have argued confiscating Russian bank reserves will accelerate nations’ dedollarization. That is just what is happening.

How can these countries do trade efficiently with each other now, let alone be able to do tradewithG7 nations outside of the Swift system someday bilaterally. They need to remove lack of trust from the equation. Enter Gold.

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