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Central banks hedge themselves

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Anna Svahn
6 Nov 2018 | 3 min read
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After the recent turmoil on the market, it is no wonder if investors are looking for other types of asset classes than shares. Such an asset class is usually gold, which often serves as an investor's friend in the Gulf. Some others who have begun turning more and more towards the yellow stones are European Central Banks, which for the first time in over a decade have begun to expand their gold reserves. But what does that mean?

After the recent turmoil on the market, it is no wonder if investors are looking for other types of asset classes than shares. Such an asset class is usually gold, which often serves as an investor's friend in the Gulf. Some others who have begun turning more and more towards the yellow stones are European Central Banks, which for the first time in over a decade have begun to expand their gold reserves. But what does that mean?

Over the past ten years, central banks around the world, especially in Russia, China and Kazakhstan have bought a lot of gold and the world's central banks hold a total of about one-fifth of all gold ever excavated. Recently, the European Central Bank's expansion of its gold reserves has surprised the gold market. Although Poland's total gold reserve did not increase significantly, Hungary just recently declined its reserve of the inflation-proof asset.


After deepening me in the enchanting world of central banks through one book after the other in recent months, I have more questions than ever before. If a central bank intends to pursue stable monetary policy and avoid future financial crises, how often will it be just because politicians working at central banks are facing these crises? Why did one of the United States former president of the Federal Reserve say that future recessions were impossible - when we were in the middle of one? And why did someone else say that instead of trying to make the crises stimulate the economy so much that it would "weigh up" the crises that follow.

Another problem is what low and negative interest rates entail. Bloomberg wrote an article calling the "desperate action of central banks", claiming that the central banks punish the banks that raise money because it entails increased costs, thus forcing banks to lend more money - at higher risk not to pay for the money they have.

In addition, I wonder how it is meant that so-called QE programs that allow central banks to get around the fact that they can not buy government bonds directly from the state, thus paying major banks to act as intermediaries or so-called "primary dealers" it is called, will lead to reduced systemic risk in the banking system. Is this a result of low interest rates leading to excessive lending and excessive risk taking for the banks?

In the Middle Ages in Britain, they eventually got their monetary system consisted of so-called "tally sticks" or wooden sticks because the then central bank had created so many new "tally sticks" that they lost purchasing power and eventually seemed worthless. In the attempt to cook some of the pins, the bank also burned down. Two years after the Bank of England was founded, the total gold reserve amounted to only £ 36,000 or just 2 percent of the total money in circulation - although they should learn from their past mistakes about what happens if you push too much money . In 1791, Thomas Jefferson wrote a letter to the United States Federal Revenue, where he criticized the monetary policy that led people and businesses to borrow too much money. In 1792, the so-called "panikraschen" occurred because the banks demanded the money they borrowed - because they loaned them out for cheap.

Why do central banks buy gold? Gold - the inflation-proof asset - used as hedge against other assets. Why does the central bank want to secure its own actions and what does it mean to us ordinary investors?

Are the recent purchases of gold by central banks a sign that they have learned something for the first time through history? - They have no idea what they are doing.

Anna Svahn

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