The world’s central banks have been investing in physical gold bullion at a record-breaking pace, the likes of which we haven’t seen in six years. According to Macquarie, central banks purchased 264 tonnes of gold between January and September of 2018 alone.
Although the US remains the world’s largest official buyer and owner of gold — with 27,000 tonnes of gold bars in holding — China has been buying gold at a torrid pace over the last two decades.
China overtook South Africa to become the world’s largest gold producer in 2007, and surpassed India to become the biggest gold buyer in 2014.
Today, China accounts for nearly 15% of global gold production and has actively decided not to sell a gram of gold to other countries. This has enabled China’s central bank, the People’s Bank of China, to stockpile more than 10,000 tonnes of gold since 2000.
What are Central Banks?
Simply put, central banks handle the monetary policies of the countries that they represent, increasing or decreasing the money supply to ensure economic goals are met. While a government chooses where to spend their money, the central bank dictates how much they have to spend.
The US Federal Reserve is an example of a central bank, along with the People’s Bank of China, and the European Ce
ntral Bank, which covers the Eurozone.
While the main driver of this gold rush by central banks is unclear, there are plenty of reasons why gold remains an attractive investment.
What Makes Gold A Valuable Investment?
Gold is a valuable currency for a variety of different reasons.
Liquidity describes how easy or hard it is to buy or sell a certain investment or asset. If a company was selling a cryptocurrency that had no demand, that token would have very low liquidity, as it would be difficult to find a buyer or a seller.
Precious metals like gold have been traded for millennia and have remained in constant demand throughout history. From fund managers to young investors, gold has remained a token of currency and a valuable investment.
In fact, the gold market was worth an astounding $6.3 trillion in 2014 alone. Behind only dollar and euro-denominated assets, it’s the third largest reserve asset held by central banks. In addition, gold is highly traded within international markets, with an average of $145.5 billion USD in global over-the-counter trades.
Many investors and fund managers recommend at least 5% to 10% of any investment portfolio should be in gold. According to Bloomberg, investment portfolios with this asset split outperformed the global market by 0.55% every year for the last three decades.
Gold’s asset value stems from its independence from market volatility. From geopolitical climates to currency manipulations, investments that are backed by financial markets can be susceptible to external factors that are out of the control of investors and fund managers.
Former Federal Reserve Chairman Alan Greenspan said that central banks like gold because “it has always been accepted without reference to any other guarantee”.
Investing in gold provides portfolios with an avenue to mitigate losses from potential tail-risk events and market crashes by ensuring their value isn’t connected to any other asset.
Independent from Counterparty and Credit Risk
Counterparty risk is the possibility that a party that has signed a contract, in any form, will not live up to their agreed commitments. This could be as mundane as paying a bill and expecting the agreed-upon services, or as complex as trusting investments or assets with a financial institution that collapses.
Investing in assets that bear counterparty risk can add unnecessary vulnerability to your portfolio. This is because many of these risks can’t be foreseen, resulting in an unfortunate surprise that could wind up being costly.
Precious metals like gold are virtually counterparty risk for a variety of different reasons. First, they aren’t country-specific as many currencies are, which helps protect them from the adverse effects of geopolitical strife. This also improves their already-high liquidity, enabling to be traded around the world without limits.
Gold is an asset that an investor owns, free of contractual obligations. This can’t be said for other investment assets such as fiat currencies, which are technically not owned by the investor.
Instead, bank notes and other similar assets which are under the control of a third-party financial institution are nothing more than a liability to the customer.
For instance, owning gold exchange-traded funds (ETFs) may seem like they would be free of counterparty risk, as they involve investing in precious metal. However, ETFs are paper gold, and thus carry counterparty risk to institutions that investors may or may not even know.
ETFs are dependent on a variety of different factors that could diminish asset value, including the knowledge of the fund management, the delivery of the assets, the regulations that are in place, a
Gold is less dependent on stock market volatility than other assets, providing protection from bankruptcies and market crashes.
The following image showcases gold vs S&P 500 over the last 15 years.
While both assets fluctuate in value throughout this time frame, gold can be seen increasing in value while the S&P 500 falls in value, particularly in the early 2000s.
Central banks are largely responsible for sustaining the purchasing power of their respective currencies. However, depending on the fiscal policies initiated by governments, along with uncontrollable market fluctuations, purchasing power can be hard to maintain.
Since the US Federal Reserve was first introduced, the American dollar has lost 95% of its purchasing power according to the Consumer Pricing Index.
In 2009, the Zimbabwean economy crashed after their national currency reached staggering hyperinflation levels, leading to the printing of $100,000,000,000 banknotes, and the overall demise of their currency’s purchasing power.
The limited supply of gold helps protect investors against hyperinflation and provides central banks with a simpler way to sustain purchasing power. It’s harder to increase gold production than it is to print and mint currencies.
Gold is Reinventing Payments and Investments
There’s a reason why central banks like the US Federal Reserve and the People’s Bank of China are stockpiling gold at record paces.
Gold has a traditional identity ingrained in cultures around the world, known for its status and value. Plus, it’s the perfect investment; a stable low-risk asset that protects investors from unpredictable market collapse and counterparty risk while guaranteeing its value over time.
How to Buy Gold?
With today’s technology, owning real gold has never been easier or more of a lucrative opportunity.
G-Coin is changing the way that people pay and invest with digital tokens that represent responsibly-sourced gold.
When you buy a G-Coin token, you’re buying a gram of real tangible gold secured in a vault, removing the counterparty risks and market worries that come with traditional assets like fiat currencies and gold ETFs.
G-Coin tokens carry the high liquidity of gold with the added benefits of a digital token. That means you can hold digital gold as a store of value, redeem them for physical gold, exchange them for different currencies or use them as a gold-backed cryptocurrency to purchase products.
Whether you’re making payments or managing investments, legitimacy and security are a constant concern. No matter where your assets are going, they need to be taken care of.
We apply robust KYC/AML compliance and transaction regulations and advanced smart contracts to deliver a user experience that is both secure and convenient.
G-Coin relies on advanced blockchain technology to track conflict-free gold from mine, to refinery, to vault. Each gram of gold represented by a G-Coin tokens has a recorded origin, provenance and custody ownership, preventing fraud and other counterparty risks.
Ethical finance is important to us. That’s why each G-Coin token is ERC-20 compliant, and our intelligent supply chain solution adheres to the strictest responsible sourcing regulations and protocols.