Central banks keep currency reserves so that they can purchase the domestic currency, which is considered a liability for the central bank since it prints the money or fiat currency as IOUs). Gold reserves are held in large quantity by many countries as a means of defending their currency, and hedging against the U.S. dollar, which makes up the bulk of liquid currency reserves.
Gold preserves wealth which is why countries hold large gold reserves, and why investors buy Gold stocks. If their own currency comes under attack, they can use their gold reserves to defend and protect the value of their own currency. A great example of this is Iran. International sanctions against Iran for their nuclear program caused the Iran’s paper currency, the rial, to plunge over 50% in value. Iran has started on an massive gold acquisition program to protect its rial currency. Turkey is Iran’s biggest natural gas customer, but Western sanctions prevent it from paying Iran in U.S. dollars or euros. Iran is instead paid in gold. Gold exports from Turkey to Iran jumped to $6.5 billion in the first 11 months of 2012 from just $54 million for all of 2011, as the United States tightened sanctions over Iran’s disputed nuclear program.
The U.S. State Department said in December that U.S. diplomats were in talks with Turkey over stopping the flow of gold to Iran. Turkish Economy Minister Zafer Caglayan said last week that the gold sales to Iran would continue, saying the trade was carried out entirely by the private sector rather than between states and was not subject to sanctions.
Some are even speculating that Iran will try and accumulate enough gold to put its currency, the rial, on the gold standard thus defeating sanctions by the West aimed at destroying the value of its currency.
“Iran is very keen to increase the share of gold in its total reserves,” says Gokhan Aksu, vice chairman of Istanbul Gold Refinery, one of Turkey’s biggest gold firms. “You can always transfer gold into cash without losing value.” Think about that for a minute. This is exactly what you and I will be doing with our gold IRA investment one day. We accumulate gold now and when it’s time to pull it out when we retire, we will have the IRA custodian sell our gold and precious metals inside our IRA on the open market and send us the cash.
The West targeting Iran’s currency via restricting trade in euros and U.S. dollars is making Iran’s allies dump the U.S. dollar at an even faster rate. In most regions in the Middle East and certainly around Iran, the U.S. is viewed as an outsider, a bully if you will, affecting trade in their region via the bully U.S. dollar.
One of the unexpected, and unintended consequences of the draconian sanctions against Iran, is that Iran is forced to find alternative ways to buy and sell outside the hegemonic U.S. dollar based global financial system.
One such method is to pay for stuff, and accept payment in, gold.
And apparently, that is what is happening – as it has now been confirmed by Turkey that it is paying Iran in gold for natural gas.
This is a very interesting development, because as other regional players participate in this gold exchange, it creates an awareness that paying in the U.S. dollar or euro is not the only game in town and that with the gold trade, they can no longer be bullied by Europe or the U.S.
So again we see that gold preserves wealth.
China To Continue Buying Massive Amounts Of Gold For The Next 20 Years
China has doubled its gold reserves in the last five years but still holds much less gold than most other nations.
In a country-by-country comparison, the figure was 1.8 percent in China, while it was 76.6 percent in the United States, 73.7 percent in Germany and 71.8 percent in France, according to data from the World Gold Council and the International Monetary Fund.
China will be buying gold for many, many years as it pushes its gold reserves from 1.8 percent up to the 70 percent level inline with other developed countries around the world.
Gold Has Renewed Role In Global Monetary System
The Official Monetary and Financial Institutions Forum report concluded, “Gold will increasingly have a renewed role in the global monetary system, attracting a higher level of attention from policy makers and financial market practitioners.”
We can see gold’s rise to dominance in the global financial system by looking at how central banks have bought more gold in 2012 than any time since the 1960s.
Remember, for the better part of the last 50 years central banks had been net sellers of gold. But all the central banks stopped selling gold altogether in 2009, instead becoming the net buyers they remain today.
Amount of gold purchased by central banks
The abrupt shift in policy was brought about by the global financial crisis that began in 2008.
The massive increase in the global money supply and the high level of systemic risk spawned by the crisis drove central banks to diversify their foreign reserves by buying gold.
The Bank of Korea increased gold reserves 20 percent last month. The bank added 14 metric tons in November, bringing the total to 84.4 tons, the bank said in a statement today. By value, holdings increased about $780 million to $3.76 billion, equivalent to 1.2 percent of total reserves, the bank said. “Gold is a physical, safe asset,” the Bank of Korea said in the statement. The precious metal “is a way of diversification, which helps reduce investment risk in terms of foreign-exchange reserves management,” it said.
The National Bank of Ukraine raised the percentage of gold in its reserves this year to 7.72 percent from 4.36 percent a year ago. Since the beginning of 2012, the amount of monetary gold in Ukraine’s international reserves had increased by 25.5 percent, or 230,000 troy ounces, to 1.13 million troy ounces. The bank said it is boosting its gold reserves “to avoid the negative impact of the global crisis on the economic development of the country as it works on diversifying the components of international reserves in Ukraine.”
Brazil doubled its gold holdings in two months, buying 17.2 metric tons in October and 14.7 metric tons in November of 2012.
In August and September of 2012, Iraq increased its gold reserves to 31.07 metric tons from 5.8 metric tons, a nearly 600% increase.
The central banks of the following countries showed increasing gold purchases in 2012: South Korea, The Philippines, Kazakhstan, Russia, Mexico, Turkey, Argentina, Ukraine, along with several others. The central banks are buying gold to reduce their reliance on the U.S. dollar as a reserve asset. The purchases made by the central banks of developing countries have been increasing in recent years, as those nations diversify holdings, partly because of rising foreign-exchange reserves through export-led growth, but also, more recently, as a reaction to the sovereign-debt crises affecting traditional reserve currencies, like the U.S. dollar.
Gold is beginning to re-establish itself as part of the fabric of the financial system.
Gold’s fundamental property as a vehicle for capital preservation continues to endure. It does not matter whether you are talking about Iran trying to preserve its national wealth in the face of crippling sanctions, central banks trying to preserve their wealth against the sovereign debt crisis, governments trying to preserve their wealth against the falling value of their currencies, or you trying to build and preserve your personal wealth in your retirement account. The truth remains that there is no better way to preserve wealth than with physical gold. This confirms that a gold IRA investment is the best and only way to preserve wealth.
Somebody may have told you that learning how to invest in a gold IRA is complicated. If you look at the entire process and try to do it yourself, yes, it can be a little intimidating. But you don’t have to go it alone.