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Dutch Central Bank Admits It Has Prepared for a New Gold Standard
Dutch Central Bank Admits It Has Prepared for a New Gold Standard
In a recent interview the Dutch central bank (DNB) shares it has equalized its gold reserves, relative to GDP, to other countries in the eurozone and outside of Europe. This has been a political decision. If there is a financial crisis the gold price will skyrocket, and official gold reserves can be used to underpin a new gold standard, according to DNB. These statements confirm what I have been writing for the past years about central banks having prepared for a new international gold standard.
Wouldn’t a central bank that has one primary objective—maintaining price stability—serve its mandate best by communicating the currency it issues can be relied upon in all circumstances? By saying gold will be the safe haven of choice during a financial collapse, DNB confesses its own currency (the euro) does not weather all storms. Indirectly, DNB encourages people to own gold to be protected from financial shocks, making the transition towards a gold based monetary system more likely.
Old gold vault of DNB in Amsterdam.
How to Prepare for a Gold Standard
In my latest article on this subject—“Europe Has Been Preparing a Global Gold Standard Since the 1970s. Part 2”—I have demonstrated that central banks of medium and large economies in the eurozone have balanced their official gold reserves, proportionally to GDP, to prepare for a gold standard (/gold price targeting system). My analysis was pieced together by scarce quotes from central banks and data of European gold and foreign exchange holdings. My conclusion was that several medium-size economies in Europe (the Netherlands, Belgium, Austria, and Portugal) sold large amounts of gold from the early 1990s to 2008 to come on par with France, Germany, and Italy. I wrote:
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The West Is Losing Control Over the Gold Price
The West Is Losing Control Over the Gold Price
An important change has unfolded in the global gold market. The East has been driving up the gold price, predominantly in late 2022 and the first months of 2023, breaking the West’s long standing pricing power.
Gold bazaar in Turkey. Pricing power in the gold market has recently shifted to the East.
Until recently, Western institutional money was driving the price of gold in wholesale markets such as London, mainly based on real interest rates. Gold was bought when real rates fell and vice versa. However, from late 2022 until June 2023 gold was up 17% while real rates were more or less flat, and Western institutions were net sellers. Most likely, Eastern central banks, and Turkish and Chinese private demand, lifted the price of gold.
Introduction
For about ninety years, up until 2022, there was a pattern of above-ground gold moving from West to East and back, in sync with the gold price falling and rising. Western institutions set the price of gold and bought from the East in bull markets. In bear markets the West sold to the East. For more information read my article: The West–East Ebb and Flood of Gold Revisited.
If we zoom in on the period from 2006 through 2021 the main reason for Western institutions to buy or sell gold was the 10-year TIPS rate, which reflects the 10-year expected real interest rate (“real rate,” in short) of US government bonds.
The physical gold price was predominantly set in the London Bullion Market and to a lesser extent Switzerland. Gold trade in London can be divided in three categories:
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Zoltan Pozsar, the Four Prices of Money, and the Coming Gold Bull Market
Zoltan Pozsar, the Four Prices of Money, and the Coming Gold Bull Market
Over the past 100 years there has been a correlation between major equity bear markets, adjustments in one of the four “prices of money,” and gold bull markets. If we let history be our guide, the current equity bear market is signaling a new gold bull market, supported by changes in the price of money.
With equities in a bear market, and the Fed adjusting the price of money, we can expect a gold bull market in the coming years.
One of the more intriguing financial analysts of our times is Zoltan Pozsar, Managing Director and Global Head of Short-Term Interest Rate Strategy at Credit Suisse. In his writings of the past months, one of the things that caught my attention was his framework for multiple prices of money. Remarkably, when I looked up big historical changes in the price of the US dollar, they usually succeeded equity bear markets and introduced gold bull markets. Because equities are in a bear market as we speak, we can expect a gold bull market in the years ahead, enabled by the Federal Reserve changing the price of money.
First, let’s see how changes in the price of the dollar have caused gold bull markets in the past 100 years. Then we will add the stock market.
The Four Prices of Money and Previous Gold Bull Markets
Pozsar’s money framework, which he got from his intellectual mentor Perry Mehrling, states money has four prices:
1) Par, which is the price of different types of the same money. Cash, bank deposits, and money fund shares should always trade at a one-to-one ratio.
2) Interest rates, which is the price of future money.
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What You Need To Know About Physical Gold Supply And Demand
What You Need To Know About Physical Gold Supply And Demand
Much of the confusion regarding the gold price has to do with gold’s dual nature, being both a currency and a commodity. This confusion is removed when you realize that in terms of supply and demand dynamics gold trades more like a currency than a commodity.
The major difference between gold and perishable commodities is their stock-to-flow ratios, measured by the above ground stock divided by annual production. Gold has a very high stock-to-flow ratio, while commodities like wheat have a low stock-to-flow ratio.
Thousands of years ago people started using gold as money, because gold is immutable, easily divisible, and scarce. Gold is the most marketable commodity. Its long tradition as store of value means extremely little gold has been wasted over history. The vast majority of all the gold ever mined is still with us. Consequently, annual mine production adds about 1.7% to the above ground stock of gold.
![Abobe_ground_gold_stock[1]](https://images-gainesvillecoins.netdna-ssl.com/blog/2022/03/abobe_ground_gold_stock[1].png)
Most above ground gold is held for monetary purposes. Jewelry is a store of value combined with esthetics and status.
At the time of writing the total above ground stock of gold is 205,000 tonnes and global mine output in 2021 accounted for 3,560 tonnes. The stock-to-flow ratio (STFR) is currently 58 (205,000 / 3,560). Gold’s high STFR and the fact that most above ground gold is held for monetary purposes is what makes it trade like a currency.
For a thorough understanding of gold’s price formation, let’s first have a look at supply and demand dynamics of a perishable commodity. Then we will discuss how this differs from the gold market.
Soft Commodity Supply and Demand Basics
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