Central banks' gold reserves surpass the value of U.S. Treasury bonds they hold?
In a recent stir, a chart shared by Mohamed El-Erian on LinkedIn has sparked debate about the current state of central bank gold reserves and US Treasury holdings. The chart, however, may not present the full picture.
According to the International Monetary Fund (IMF), as of the latest report, $6.7 trillion of the $11.6 trillion global allocated Foreign Exchange (FX) reserves are in US dollars, constituting 58% of the total. This suggests a significant reliance on US Treasuries by central banks.
However, the chart in question seems to challenge this narrative, purportedly showing central banks owning more gold than US Treasuries. This claim, while attention-grabbing, requires a closer look.
Firstly, it's important to note that central bank reserve data should be taken with a grain of salt. Issues with correct attribution and self-reporting can make the data less reliable. For instance, the Currency Composition of Official Foreign Exchange Reserves (COFER) data does not account for agency debt, which would likely make the first chart look very different.
Moreover, the calculated value of gold holdings by central banks at the end of June is $3.86 trillion. Since the end of June, the gold price has rallied a further 10.5%, and the World Gold Council estimates that central banks have continued buying gold. However, there hasn't been a detectable acceleration in the official data, suggesting that central banks might be holding their gold purchases through intermediary custodians such as Euroclear in Belgium and Clearstream in Luxembourg to mask direct ownership.
Countries like China, India, and Brazil have significantly increased their gold reserves in recent months, partly to reduce dependence on U.S. dollars. However, a direct correlation between increasing gold reserves and decreasing U.S. Treasury holdings is not explicitly documented for these countries.
It's also worth noting that fears over the Trump administration's economic policymaking and the weaponization of the US dollar are driving some reserve managers to move out of Treasuries and into gold. However, the underlying reality isn't as dramatic as it may seem on a chart. Sharp price rises in gold haven't brought a grinding halt to central bank gold additions.
The IMF reports the number of Troy ounces held by central banks and a series for total reserves including gold. If central banks haven't been buying gold since the end of June, price changes would take the value of international reserves to $4.2 trillion. This is still a substantial amount, indicating that central banks continue to hold a significant portion of their reserves in gold.
The actual crossing of the two lines (gold holdings and US Treasury holdings) will be known on October 17, when the next official data is released. Until then, it's crucial to approach the chart with a critical eye, considering the complexities and nuances involved in central bank reserve management.
In conclusion, while the chart has certainly sparked interest, it's essential to consider the limitations of central bank reserve data and the potential strategies central banks might be using to manage their reserves. A more comprehensive understanding of these issues will help us navigate the evolving landscape of global finance.
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