End of a Golden Era

Canada Says Farewell to Gold

One upon a time most currencies were backed by gold. But in 1971 president Richard Nixon took the U.S. off the gold standard switching to a floating currency instead so its Central Bank can exert more influence over the currency, and other countries followed suit. Today, everyone uses fiat currency and gold is no longer relevant on the world’s financial stage.

Canada use to have more than 1,000 tons of gold in the 1960’s as part of our foreign exchange reserves. But Ottawa has long forsaken the notion that gold can be a useful diversification tool for a country’s monetary interest. For decades Canada has been slowly selling off its gold reserves, and according to the Finance Department, it only has 77 ounces of gold coins remaining today, which is worth about US $100,000. That’s nothing more than a rounding error compared to the US $80,000,000,000 of total foreign exchange reserves we have.

As Canada gets out of the gold game, others are buying more. According to the World Gold Council, central banks around the world added a net of 336 tons to their reserves in the second half of 2015, representing a 25% increase from the previous year. Russia and India have increased their holdings. And since the start of this century China has bolstered its gold reserves by 350% from 400 tons in 2000 to nearly 1,800 tons today. Even individual investors have helped take gold off the Bank of Canada’s hands. A couple years ago I blogged about buying a 1 ounce limited edition gold coin for CAD $1,389. It’s easily worth 20% more today given the current spot price of gold. 🙂

Here’s a look at the biggest holders of gold by country. (source)

Based on the chart above, we can see that the U.S. central bank holds the most gold by a wide margin. The 8,133 tons of gold held by the U.S. make up 72% of its foreign exchange reserves. The next 3 countries in the list, Germany, Italy, and France also holds more than half of their reserves in gold.

It’s interesting how other central banks seem to be holding or even increasing their gold reserves while Canada has done the exact opposite, lol. I’ll write about the possible reasoning behind these two diverging ideologies around gold in a future post, but it has to do with the nature and purpose of Foreign Exchange Reserves, which requires a rather lengthy explanation.

Gold vs Silver 

Both gold had silver have returned double digits in US dollars since the beginning of the year, unlike the U.S. stock market which has lost value year to date. But this is a natural cycle. When stocks go down, gold is expected to feed off people’s fear and move up. I don’t give advice on what people should buy or sell. But if anyone is already thinking about picking up some precious metals and isn’t sure whether to invest in gold or silver, one useful resource I always look at is the gold/silver ratio. It’s the simple concept of dividing the current price of gold by that of silver. In other words, how many silver coins can be bought with one gold coin of the same weight. If we track this ratio over time we’ll get a chart like the following.

As we can see the ratio between gold and silver has fluctuated over the past 30 years, but for the most part (over 80% of the time) is contained within the 50 to 80 range. Basically if the ratio reaches the green line then it’s better to buy silver. And if the ratio drops down to the blue line then gold would be a better buy. I purchased 20 ounces of silver last week since silver is currently undervalued based on the graph.

Before anyone goes to buy physical gold or silver it’s always a good idea to ask “why.” If investing is the goal then have an exit strategy before getting into the commodity. Unlike stocks or bonds precious metals don’t pay dividends or interest. If you are a collector then consider buying coins rather than bars. I also don’t recommend holding too much of it. Personally I only maintain about 1% to 2% of my assets in precious metals.

I think a number of factors in the short term could lead precious metals to outperform stocks this year. Canada has been supplying tons of gold to buyers for decades but the country has finally run out of gold to sell. Moving forward there will be less gold supply in the market which should put upward pressure on the price. The U.S. election is a big uncertainty and many people, including non-Americans, are nervous about the real possibility of a Donald Trump administration in the White House. Global growth is slowing and some analysts predict the U.S. is headed soon for a recession. Negative interest rates in Europe and Japan also make gold more attractive for investors. As uncertainty continues to linger around the world I believe gold will continue to shine. 😀

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Random Useless Fact:

New Zealand consumes the most ice cream per-capita in the world at 28 liters/person per year. The United States takes second place with 21 liters/person per year.