Emerging markets dont need a Harvard economist to tell them to buy gold

Harvard economist Kenneth Rogoff recently penned an article for Project Syndicate in which he urges central banks in emerging markets to buy gold.

Thats somewhat odd advice coming from Rogoff, considering that he is among the crowd of insider economists (along with Larry Summers and Willem Buiter) who have urged a ban on large-denomination cash in order to facilitate the imposition of negative interest rates. (Incidentally, the elite bankers are on their way to doing just that, with news leaking this week that about 100 business executives held a secret meeting last month to test out a digital-cash prototype based on blockchain technology.)

Underweight in gold: But here he is pushing for emerging markets to trade their foreign-exchange reserves for the ultimate form of hard money: gold.

Are emerging-market central banks overweight in dollars and underweight in gold? Rogoff asked. There is a good case to be made that a shift in emerging markets toward accumulating gold would help the international financial system function more smoothly and benefit everyone.

Rogoff goes to the trouble of differentiating himself from so-called American far-right crackpots who favor the gold standard. I am just proposing that emerging markets shift a significant share of the trillions of dollars in foreign-currency reserves that they now hold (China alone has official reserves of $3.3 trillion) into gold, he added.

News flash for Rogoff: They already are, in spades, with China and Russia leading the charge.

Standouts are Russia and China: In reporting a 4% year-over-year rise in gold demand in fourth-quarter 2015, the World Gold Council noted growth was driven by central banks, which added 33 metric tons, largely in emerging markets.

And according to leading precious-metals consultancy Thomson Reuters GFMS, the 483 tons amassed by central banks in 2015 marked the second highest annual total since the end of the gold standard, the Financial Times reported.

Russia accounted for 206 of those tons, while China added 104 tons. Russia and China are real standouts, said GFMS exec Ross Strachan. And the real picture could be even greater, given that many gold analysts say China is hiding the true pace of its gold-accumulation efforts.

The trend of central-bank gold buying has taken off since 2010, marking the end of two decades in which they were net sellers. A key driver was an increase in purchases from developing countries, and net purchases jumped in 2012 to 544 tonnes, the Financial Times added.

Diversifying away from the dollar: Despite some gold sales, most notably by Venezuela, which is in the midst of an unprecedented financial crisis, the super-bullish central-bank buying trend remains intact

There are good reasons for central banks to continue to use gold as part of their reserve assets, including diversification away from the dollar, said Capital Economics economist Simona Gambarini. This is mostly the case for emerging markets central banks, which have lower gold holdings as a percentage of total reserves, compared to advanced economies.

So, emerging markets are buying gold en masse, and for all the reasons that Rogoff notes: its nearly fixed supply with no limit on price, not to mention the fact that its a highly liquid and extremely low-risk asset.

Making the yuan, ruble as good as gold: Why are emerging markets moving into gold? The currencies of Russia, China and other Eurasian countries are moving to become as good as gold, a term applied to the U.S. dollar some six decades ago, wrote author and consultant F. William Engdahl.

But the dollar is no longer as good as gold, and these comparatively dynamic emerging economies are weary of financing the Western standard of living by propping up the U.S. petrodollars hegemony. China is busy rebuilding its ancient Silk Road trading route to widen the influence of its currency, while building up its gold-trading infrastructure and forming strategic alliances with Russia and other resource-rich nations.

Gold-ravenous emerging markets dont need Rogoff to tell them to buy gold. They already know, without having to watch CNBC, that if youre buying gold, youre actually just selling dollars. Thats been their plan all along.

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