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Central Banks Are Buying Gold at Record Pace, What Does That Mean for Inflation?

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33 comments on Central Banks Are Buying Gold at Record Pace, What Does That Mean for Inflation?

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Warren B. Mosler noted central bank are buying gold at a record pace and that adds to global inflation. 

A second reader asked if I agreed.

Inflation Meaning

Q. What does central bank buying of gold mean for inflation?
A: Not much, per se, especially in the amount of purchases.

The Math

A metric ton of gold is 2204.62 pounds. There are 14.5833 troy ounces to a pound. That means there are 32,150.7 troy ounces per metric ton. 

As of 11:45 PM on 2023-05-29, gold is $1952 per troy ounce. 

One metric ton is worth 2022.62 * 14.5833 * $1952 per ounce = $62,701,106. Multiply that by 120 tons (lead chart) and you get $7,524,132,720. 

With monstrous US deficits, and US debt approaching $32 trillion, $7.5 billion is not enough to matter in and of itself.

Stagflation Right Now, But What’s Ahead?

On April 28, I noted forces for inflation and deflation.

For discussion, please see Worst of Both Worlds, Stagflation Right Now, But What’s Ahead?

Understanding the Real Point

Buying gold has no direct impact on inflation. However, it’s important to note that the record pace is a result of US measures to weaponize the dollar.

Weaponizing the US dollar refers to actions by the US to confiscate Russia’s dollar reserves in response to the war in Ukraine.

Regardless of how one feels about the war or Putin, this was an unprecedented and illegal action by the US. 

No Man’s Land

Weaponization of the US dollar will matter at some point, but it is difficult to say when because dollar avoidance itself is very difficult (see the first of two links below).

Weaponizing the Dollar

The second point pertains to US actions regarding failed US banks in 2023 that further weaponized the dollar. 

Weaponizing the dollar is a serious mistake, and it’s a Rubicon that cannot be undone. 

So far, however, we are witnessing symbolic actions that eventually spell a currency crisis, but we are all guessing when that is. 

This post originated at MishTalk.Com

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33 Comments
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Captain Ahab
Captain Ahab
2 years ago
Econ 101 says demand and supply factors determine prices. Remember prices are the result of demand-supply equilibrium, which assumes ceteris paribus: all influencing factors are held constant. It helps to understand the factors (what is changing, or ‘might’ change, and the associated probability)–and good econ website reviews them. As for inflation, expectations of future prices affects demand and supply.
That Central banks buy 120T ($7.2 billion) is a drop in the bucket compared to known holdings. Either the ‘factor’ changing is not that important, or the probability is low. Let’s assume SHTF is around the corner-it’s the only thing that makes sense in today’s bifurcating situation. Yet right now, CBs buy what could be considered minimal insurance (in open transactions). Under the table transactions, who knows? In fact, we won’t know until S-actually-HTF. There is also some repatriation going on, a bad sign because it reflects on international trust levels.
It is in the uncertainty where things get interesting. Who knows if there will be a SHTF situation down the road? It might even be a conspiracy by the powerful elite…. My personal ‘belief’, SHTF because we are swapped by faux debt, much of it created by ‘zero+/-‘ interest rates, which cannot be paid back. With that Sword of Damocles, and imbeciles at the helm, realistic real interest rates are next to impossible. Why not buy insurance when the probability of SHTF is (slowly) increasing?
Some of us theorize about our favorite ‘asset’ for gain and safety. For a few (risk seekers) it is concentration in the ‘asset’, oil, gold, bitcoin, land, etc. They tend to develop scenarios that support a gain in value of the asset, and discard the negative factors, which encourages them to increase the position. For others (risk averse), it is diversification, which is really gross averaging over the long term.
Of the ‘assets’, Central Banks choose gold.
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Lisa_Hooker
Lisa_Hooker
2 years ago
Reply to  Captain Ahab
Gosh, golly, you just don’t understand the fine points of dynamic stochastic general equilibrium modeling.
It has done such a wonderful job of managing the operation of the economy.
However the efficacy of the system appears to be less than throwing darts at a chart, blindfolded.
I would also disagree with Central Banks choosing gold.
Sure they buy some to have pocket change just in case.
But the asset that Central Banks choose is military hardware, just look at the numbers.
Love reading your comments, some of the most astute to be found here.
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Captain Ahab
Captain Ahab
2 years ago
Reply to  Lisa_Hooker
Some 15-20 years ago, I used to model economic factors underlying real estate–essentially applying portfolio theory to the economic base of MSAs, with lead-lag analysis of the fundamentals, feeding into a simulation model. By 2006, it was clear that gloom and doom would dominate the next few years, but no one wanted to hear it. Now, the signs are far worse. I suspect some central banks are anticipating and buying gold from their domestic sources.
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ColoradoAccountant
ColoradoAccountant
2 years ago
Gold, silver, and copper are the 3 best conductors of electricity. Silver and copper tarnish. Gold does not tarnish or corrode. Silver is used for the important circuit conections in critical equipment. Gold is used for those connections when it involves our astronauts. Gold is not a useless rock.
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Lisa_Hooker
Lisa_Hooker
2 years ago
Reply to  ColoradoAccountant
Next to depleted uranium, gold is the best doorstop.
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Roadrunner12
Roadrunner12
2 years ago
“Q. What does central bank buying of gold mean for inflation?
A: Not much, per se, especially in the amount of purchases.”
The buying of gold will have little to no effect for inflation. However inflation will drive the price of gold up or more appropriately drive the purchasing power of the dollar down however you want to look at it.
From my viewpoint what many overlook when talking about dedollarization is not what other countries are doing but the implosion of the dollar itself driving dedollarization.
You often hear about the dollar being the cleanest dirty shirt in the laundry basket somehow giving the idea that it will come out clean on the other side. I prefer the analogy of the dollar being the healthiest patient in the palliative care unit. Its days are also numbered.
Much like when one looks at Social Security, anyone with half a brain knew many years ago that it was not sustainable in its present form. Changes are coming one way or another and anyone with critical thinking can name a number of ways how the changes will be.
And anyone with half a brain doing some critical thinking knows that the dollar cannot continue in its present path with some major changes coming one way or another. How that turns out and the changes resulting from the dollar implosion are a lot more difficult to guess.
One can easily deduce though that the dollar will continue to lose purchasing power and gold will rise as a result.
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Lisa_Hooker
Lisa_Hooker
2 years ago
Reply to  Roadrunner12
Yes, if people start paying for things with physical gold the cost of gold will increase.
If they don’t, any increase will be very, very slow.
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RonJ
RonJ
2 years ago
“Weaponizing the dollar is a serious mistake, and it’s a Rubicon that cannot be undone.”
Et Tu Brute? Beware the Ides of the dollar.
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Doug78
Doug78
2 years ago
Intelligent AI will save us!
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Maximus_Minimus
Maximus_Minimus
2 years ago
Reply to  Doug78
AI, either a tool of propaganda or censorship.
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Lisa_Hooker
Lisa_Hooker
2 years ago
Reply to  Doug78
Unlikely.
We have had artificial intelligence running Washington, DC for decades.
Hasn’t worked.
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Counter
Counter
2 years ago
gold up copper down, signs of stagflation. asset bubbles are inherently deflationary
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Doug78
Doug78
2 years ago
The said “weaponization” of the Dollar is not something new. Anytime the US puts restrictions on the use of its currency to punish a country or a group it is called weaponization. It was used on Iran in 1979 for example. Restrictions on Dollar use by unfriendly countries go back even before WW II when the US put restrictions on Japan and Germany before the US entered the war. The word “weaponization” is just a new term that appeared around 2014 to describe something that had already been done for decades. The Dollar can be used as a carrot or a stick. Strangely enough when it is used as a carrot it is still described as “weaponization”. If one looks at the long term chart of the Dollar index going back to the 1960’s it definitely doesn’t look the Dollar has been losing its value vis a vis other major currencies.
Central banks have been buying gold lately but keep in mind that from the late 1990’s till only a few years ago central banks were net sellers of gold. In any case all the gold in the world amounts to only $10 trillion which is a trivial amount compared the the world’s GDP of over $110 trillion.
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8dots
8dots
2 years ago
Central banks : buy high/sell at the lows.
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Maximus_Minimus
Maximus_Minimus
2 years ago
Reply to  8dots
You can’t sell low when you’re the printor, you inflate prices then sell high.
The masters of BS believed they can do that without causing general inflation.
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Doug78
Doug78
2 years ago
Reply to  Maximus_Minimus
He was talking about gold I believe.
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Maximus_Minimus
Maximus_Minimus
2 years ago
Reply to  Doug78
I thought so, too. Gold price goes up by printing like any hard asset.
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Gotgold
Gotgold
2 years ago
The important part of your post
So far, however, we are witnessing symbolic actions that eventually spell a currency crisis, but we are all guessing when that is.
I expect nations to continue to act irresponsibly given that acting that way serves their interests – for now.
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MPO45v2
MPO45v2
2 years ago
I think a better way to look at this is what amount of produced supply is being purchased and by who. According to this link, there are roughly 3100 tons of gold mined annually ($178 billion).
If central banks are only buying 120 out of 3100 tons (3.8%) then it is indeed insignificant. The price of gold is driven by demand/supply globally and until an entity or entities with deep pockets start acquiring more than is available the price won’t be going anywhere.
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prumbly
prumbly
2 years ago
Reply to  MPO45v2
You can’t acquire more than is available, no matter how deep your pockets are. It simply can’t be done.
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MPO45v2
MPO45v2
2 years ago
Reply to  prumbly
Then how did we end up with $31 trillion in debt? You don’t know that gold reserves are ‘loaned’ out? Do you not know how markets work? Look up derivatives. It happens everyday on the commodities exchange.
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prumbly
prumbly
2 years ago
Reply to  MPO45v2
The entire point of gold is that you can’t acquire more than is available. The physical limit on availability is gold’s most important feature and entirely the reason why I invest in it. It’s the same reason central banks want to hold it.
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Lisa_Hooker
Lisa_Hooker
2 years ago
Reply to  prumbly
I disagree.
I like it because shiny, a nice colour, and does not readily tarnish.
It is also heavy and works well for ballast.
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Doug78
Doug78
2 years ago
Reply to  Lisa_Hooker
Gold is good material for golf clubs. They don’t make your swing better but they sure do intimidate your adversaries. Hard on the caddy though.
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Doug78
Doug78
2 years ago
Reply to  prumbly
The physical limit on availability is exactly why it is unsuited to be a currency. The economies can only expand in function of availability of its currency. If the currency cannot expand as the economy expands then people would hoard the currency preventing its circulation and cutting off growth in the economy.
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bgwms
bgwms
2 years ago
Reply to  Doug78
In Reply to Dout78 “The physical limit on availability is exactly why it is unsuited to be a currency.” I believe two of the greatest economists, von Mises, and Rothbard, would strongly disagree with your statement and argue that the intrinsic properties of gold along with its scarcity are exactly what make it the most marketable commodity and the best candidate for a currency yet discovered. Those properties being ; Divisibility, Durability, Homogeneity, Scarcity, Recognizability, & Marketability. Rothbard and Mises believed that these qualities of gold made it a superior form of money compared to other alternatives. They argued that a commodity-based money system, such as a gold standard, provided a stable and reliable medium of exchange that limited government intervention and protected individual liberty and property rights.
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MPO45v2
MPO45v2
2 years ago
Reply to  MPO45v2
The entire point of gold is that you can’t acquire more than is available
This is only true for physical gold not paper gold. Central banks want gold on the books to lend out, they have done this for centuries and that’s a key thing gold hoarders don’t understand, banks can use gold to lend out ‘gold certificates’ and charge interest while most people just hold it and don’t earn interest or money from holding it like central banks.
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Lisa_Hooker
Lisa_Hooker
2 years ago
Reply to  MPO45v2
Paper gold is after all — paper and not gold.
Also paper silver and platinum, and of course, lead and nickel.
They are oft times convenient.
But they cannot satisfy a “holder” that demands to take delivery.
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Gotgold
Gotgold
2 years ago
Reply to  prumbly
And so nations will act like they have an infinite supply of gold.
Just wait for kooky models calling human resource equals gold.
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MPO45v2
MPO45v2
2 years ago
Reply to  prumbly
Here you go…
Some market analysts even place the size of the market at more than 10 times that of the total world gross domestic product (GDP).
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Billy
Billy
2 years ago
Reply to  prumbly
This statement can be taken in several ways.
Fiat can be printed into hyperinflation. In the end, fiat is only a promise to pay you back.
Derivatives are just promises to pay you back. Does it really mean that you acquired it?
Everyone views wealth in a different way. Same with money.
IMO, acquiring means to take physical possession. Not an ETF. Not a contract. Not an IOU.
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TexasTim65
TexasTim65
2 years ago
Reply to  MPO45v2
A huge amount of the mined gold every year goes into Jewelry. That’s probably the biggest driver of supply and demand for gold.
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MPO45v2
MPO45v2
2 years ago
I think a better way to look at this is what amount of produced supply is being purchased and by who. According to this link, there are roughly 3100 tons of gold mined annually ($178 billion).
If central banks are only buying 120 out of 3100 tons (3.8%) then it is indeed insignificant. The price of gold is driven by demand/supply globally and until an entity or entities with deep pockets start acquiring more than is available the price won’t be going anywhere.
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