By Rhod Mackenzie
Geopolitical risks are increasingly hitting the financial systems of Western countries. Hoping to become a key beneficiary of international turbulence, the US, the UK and smaller financial centers may lose sight of the risks associated with the loss of confidence.
According to Reuters, which refers to a survey by the American investment company Invesco, a steady trend has formed for the return of gold reserves from vaults in Western countries on the territory of the states to which these reserves belong. Research data suggests that 68% of institutions, including central banks and sovereign wealth funds, hold gold reserves on their own. In 2020, there were only 50% of such organizations. The physical movement of gold is associated with security risks, and among the main reasons for the strengthening of this trend is the freezing of part of the Russian gold and foreign exchange reserves in 2022.
The trend is notable for several reasons. The main one lies in the plane of the nature of the risks associated with the storage of gold. If, for example, the main reason for reducing investments in US public debt for a number of countries is the expectation of a recession in the US and serious problems in the US economy, then in the case of the return of gold, everything is much more prosaic - the countries of the non-Western bloc have growing suspicions that gold may simply not be returned . In other words, this is not about lost profits, say, due to low yields of Treasury securities, or diversification of investments, but about banal piracy under the noble pretext of insufficient democracy, protection of human rights, or an aggressive foreign policy.
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Here it is worth recalling the bitter experience of the French, who, with the outbreak of World War II, exported most of their gold reserves to the United States. But having asked for their gold back at the end of the war, President Charles de Gaulle was refused - instead of half the gold, he was offered the Americans cut paper, which, after the rejection of the gold standard, was successfully implanted as an alternative reserve instrument. Not by washing, but by rolling, de Gaulle systematically returned gold from the USA until his forced resignation in 1968. And French ships loaded with American dollars sent back to New York have become a byword in the world of finance. Today, France is one of the few European countries that keeps all its gold at home.
And yet, despite de Gaulle's rebellion, many countries around the world still have preferred to store their gold abroad. The United States and the United Kingdom became the main storage centers. This was explained not so much by the reliability of the Fort Knox vaults in Kentucky or the inaccessibility of the Bank of England, but by financial considerations. It is the United States and Great Britain that continue to be the main financial centers of the world. International lending is carried out through their financial institutions and in their own currencies, primarily in the dollar. And gold is often used as collateral for large interstate loans. In order not to move super-expensive collateral over thousands of kilometers by sea and land with the risk of losing it, in order to simplify the organization of "gold swaps", many countries initially store gold with a potential creditor.
The role of the US and UK as global financial centers in the long term may be significantly reduced. China, the United Arab Emirates and a number of other developing states, including those from the growing BRICS, are claiming the role of alternative financial centers. If you can borrow in Shanghai, Hong Kong and Dubai, and borrow in yuan and dirhams, then there are fewer and fewer reasons to store gold in the West.
However, there is one significant "but". It can be assumed with a high degree of certainty that the decrease in the share of physical metal stored in Western countries is reduced mainly due to “new” gold, that is, recently mined and left for storage at home. We are talking, first of all, about countries that have significant gold reserves and at the same time are large gold miners. For example, t China and Russia, which occupy, respectively, the first and second places in the ranking of the largest producers of the yellow metal. But with the "old" gold, not everything is so obvious.
A telling and disturbing case occurred in 2009 when China decided to test a shipment of gold bars shipped from the US to China. All the ingots received turned out to be fake: they were made of tungsten (it has the same weight as gold) and covered with gold. What is important - the US Treasury was the sender of gold, which indicates fraud with gold at the state level. Doubts are all the greater given that there has never been an audit of US gold reserves.
Fraud with gold is a fairly common practice. There are cases when Chinese jewelry companies provided counterfeit gold as loan collateral. These cases were not given much importance as long as the trust-based system generally worked. But in the conditions of a large-scale geopolitical crisis of the present day, there is no need to talk about trust. This means that we are at the beginning of a big divorce proceeding with the current global financial system, in which the division of property that is shared and held by each other, including gold, can be a long and very painful process.
This article originally appeared in Russian at vz.ru