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Kazakhstan adds to its gold reserves. Very nice!

January 30, 2012
Nassau, Bahamas

Here’s something unexpected. According to IMF data, the central bank of Kazakhstan recently purchased 3.1 metric tons of gold, increasing its reserves by 4.2%. In an even more stunning development, Mongolia’s central bank purchased 1.2 metric tons, increasing its reserves by a whopping 52%.

 Kazakhstan adds to its gold reserves. Very nice!

To be fair, 4.3 metric tons of gold is not much. At current market value, it’s around a quarter of a billion dollars, just a small fraction of last year’s worldwide gold production. It is an interesting, trend, though.

Years ago, most radidly developing countries enjoying their first taste of wealth would have been more than happy holding dollars. Today, it’s becoming obvious to everyone that sitting on a bunch of worthless fiat paper does not make a sound balance sheet.

Over the years, central banks have managed to accumulate trillions of dollars worth of foreign reserves, the vast majority of which is in dollars, euros, and yen.  This is a big problem. Asset managers (including central banks) need a reasonable store of value to hold their cash and reserve funds, and none of those three is a good option.

What’s more, as the euro drama continues to unfold, central bankers will be increasingly forced to choose between the fundamentally flawed US dollar, and the fundamentally flawed yen. No other currency can absorb hundreds of billions of dollars worth of capital flows.

One suggestion being discussed openly by many central bankers is to hold foreign reserves in a new, specially created reserve currency similar to the IMF’s SDR– essentially a global currency that’s only accessible as a medium of exchange for central banks.

Now, this may be the dumbest idea in the history of modern finance– solving the problem of too much structurally unsound fiat currency by creating a new fiat currency backed by other fiat currencies? It’s unimaginably stupid.

For now, though, there is no solution… which means that big economies weilding hundreds of billions, even trillions of dollars, have very few options. And it’s a tough problem to manage.

For example, a friend of mine who works at one of China’s sovereign wealth funds once told me that they don’t look at any deal where they can’t deploy at least one billion dollars.

As any successful investor knows, finding a great deal is not easy. Finding one that’s worth at least a billion dollars is seriously difficult. Finding thousands of them across which you can invest trillions of dollars is an impossibility.

This is why sovereign fund managers, just like pension funds and bank asset managers, keep falling back on the same old, tired investments that don’t make any sense– US Treasuries, Japanese government bonds, etc. It’s the only asset class on the planet where you can park a billion dollars with relative ease.

Little guys like Kazakhstan and Mongolia don’t have that problem; they can fly under the radar, build reserves, and continue accumulating precious metals in meaningful quantities (as a proportion of their holdings) without moving the needle too much. China and Saudi Arabia can’t.

It’s a good model for the rest of us to follow– stay liquid, steadily acquire precious metals, and fly under the radar.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • Harbl The Cat

    As a Canadian, that’s a bit depressing.  The Bank of Canada has a total gold holdings of about 3 metric tonnes of gold… about 60% of Canada’s forex reserves are US dollars.  The rest is in other fiat currencies.

    Great to be Canadian, eh?

  • Eamon

    Unless they took delivery upon purchase and are storing it in places they control, the jury is still out on whether or not they will be able to obtain what they just bought. Unless and until you possess the hard metal, you only own (potentially-worthless) paper. Godspeed.

  • $10039200

    I’ve been heavily invested in gold since 2003, and so confirmation bias draws me to this article. But is now being in the same camp as the Kazakh and Mongolian central bankers really a good thing, or a warning? I’ve spent a lot of time in Mongolia and love the place, but they’re very much feeling their way towards a modern economy, and have little experience. I suspect Kazahkstan is rather the same.

  • Auto44231086

    In the larger geopolitical scheme, nearly all central banks (exceptions being Iran and North Korea) are manipulated by the London-based Zionist cabal to advance the NWO. I would rather see gold going into private hands, particularly small individual investors who comprise the freedom-oriented remnant, rather than into the coffers of central banks, national governments, or other fascist or oligarchic coercive entities.

  • Hiday_happy remeber the past cz i will never meet my friend again…

  • Hughes4lp

    rapidly developing countries

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