Gold - a safe haven for goodies (and baddies)
US net investment income has turned negative for the first time since the data series began to be published in 1960. It declined from a recent peak of 1.4% in 2018 to a negative 0.07% of GDP in the four quarters to 3Q24 according to Bureau of Economic Analysis. Previous dailies have noted the rapid decline in America’s net international investment position (NIIP), which represents the difference between US assets abroad and foreign assets in the US. America’s net international investment position deficit has risen from 39.9% of GDP at the end of 2017 to a record 89.9% of GDP at the end of 2024.
Following the Russian invasion of Ukraine, the Group of Seven froze Russia’s foreign exchange reserves held in the Group of Seven currencies. While the Russian economy has not collapsed, Bloomberg recently reported that Russia’s economy is facing a worsening outlook that is far graver than publicly acknowledged. There is a credible risk of a systemic banking crisis in the next 12 months according to Russian banking officials.
The increasing evidence of Russia’s mounting economic problems (due to sanctions) and the seemingly unstoppable decline in America’s financial position have been behind the resurgence of central bank gold bullion purchases. A report issued last week by the European Central Bank highlighted the shifts underway in the portfolios of global central banks.
Central bank reserve managers bought 1,000 metric tons of gold in 2024, double the pace of the previous decade. Interesting both Germany and Italy are reported to be considering repatriating their physical gold reserves currently held in America. At the end of 2024 the dollar accounted for 58% of global foreign exchange reserves compared to 65% a decade earlier. Gold has now replaced the Euro as the second largest component of central bank reserves after the dollar.
There is no evidence that either Japan, China or the Swiss (the countries with the three largest foreign exchange reserves) are reducing their dollar assets but it seems increasingly unlikely that they will add to existing dollar reserves.
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