From the ship Sovereign
In December 1916, as the German and Austro-Hungarian armies approached Bucharest, the Romanian government made a decision that probably seemed perfectly reasonable at the time.
Romania had entered the First World War a few months earlier with a risky move, sending its army across the Carpathian Mountains to conquer Austro-Hungarian Transylvania – believing that Germany and Austria-Hungary were too exhausted to stop them.
But Romania’s gamble failed within a few weeks. The German and Austro-Hungarian armed forces were exhausted, but not so much that they could have allowed Romania to march unhindered across the border and conquer territory.
The Central Powers reacted swiftly, pushing the Romanian army back to Bucharest and then advancing on the capital. The King of Romania and his court fled the country shortly before it fell.
Shortly before the capitulation, Romania’s Prime Minister Ion Brătianu made a bold decision: he ordered the country’s gold reserves to be moved to safety. He ordered more than 90 tons of gold to be loaded into over 1,700 crates on seventeen railway cars and transported to the only ally Romania could undoubtedly trust: Russia.
On paper, this precaution made sense. Tsar Nicholas II was Romania’s wartime ally, and a land route for transporting the national gold reserves to Moscow seemed far safer than risking German U-boats by sea to London.
Fortunately, the crates arrived safely; Russian officials securely locked the gold in the Kremlin and gave a written guarantee that the gold would remain Romanian property.
But only a few months later, the Russian Revolution broke out. The Bolsheviks seized power, arrested the Tsar, and ultimately murdered him and his family. In January 1918, Leon Trotsky broke off relations with Romania and declared its gold “untouchable for the Romanian oligarchy.”
More than a century has passed since then, and Romania is still demanding the return of its gold from Russia. The gold is now worth approximately $12 billion and has never been returned.
For most of human history, a king kept his gold where he could see it. It was behind his own walls, in his own castle, guarded by his own men. The idea of loading his treasure onto a ship and sending it to a rival’s capital for safekeeping would have seemed utter madness to any medieval monarch.
The King of France did not store his gold in London. One did not hand over one’s treasury to a rival in order to exploit the situation should relations deteriorate.
What changed first was London. In the 19th century, Great Britain ruled an empire that stretched across the globe. Its navy was unchallenged. And the British pound was redeemable for gold.
The City of London was at the center of world finance and operated the deepest gold market in the world.
For foreign governments, storing gold in the vaults of the Bank of England was not a capitulation, but an advantage. The metal was safer behind British cannons than behind their own, and given the advances of British finance, the gold could be sold, lent, or used as collateral for loans in an afternoon.
A century later, as Nazi troops conquered Europe, the center of financial power shifted to New York. Hitler’s confiscation of the national gold reserves became a far greater risk than transporting all the gold to America.
So one country after another hurried to bring their gold to safety before German tanks crossed the border.
America was the safest vault in the world: a nation surrounded on both sides of oceans, whose economy had only been strengthened by the war, and which had a bright future ahead of it.
After the war, the Bretton Woods Agreement of 1944 pegged the dollar to gold – and every world currency to the US dollar. From then on, New York (and to a lesser extent London) were the obvious places for foreign governments to store their gold reserves.
One country was able to settle international debts without moving a single ounce of gold – simply by having an employee move the gold bars from one pile to another within the same vault.
This arrangement lasted for eighty years because the US remained the most powerful and trusted government in the world. But now that trust is rapidly dwindling.
According to a recent report published by the World Gold Council, the number of foreign central banks storing gold in New York or London fell by 17% and 11%, respectively, in just one year.
The number of central banks repatriating their gold (or at least transferring it to neutral third-party vaults) has almost tripled. The gold is largely returning home.
Moreover, they are buying more of it: Central banks’ gold purchases have been at roughly double historical levels for the third year in a row.
To finance these purchases, central banks sell US Treasury bonds… or let them mature without reinvesting them.
Last year, gold overtook both US Treasury bonds and the euro, becoming the world’s largest single reserve currency. And for the first time since 1996, central banks now hold more gold than US Treasury bonds.
Central banks almost never sell gold. In the rare cases where a country does sell, it is usually because it is in a genuine crisis (like Turkey, which is selling gold to prop up a collapsing currency).
Or, as was the case with the British government in the late 1990s, they are the dumbest people on earth.
Without such an emergency or stupidity, governments and central banks “hold on” to their gold.
The bottom line is this: these countries are not transporting their gold from London and New York to sell it. Quite the opposite. This proves that they intend to hold onto the precious metal for a very long time and that they are prepared to forgo using it as a financial instrument.
All of this has nothing to do with the price of gold on any given morning.
In recent weeks, the price of gold slipped below $4,000 per ounce for the first time since November.
Since last autumn, when private investors flooded the market and drove the price of gold sharply higher, we have warned that such a decline was likely.
But we also said that the fundamental premise remains unchanged. The US continues to spend far beyond its means and weaponize the dollar. Washington remains dysfunctional – full of AOCs and Elizabeth Warrens. Therefore, central banks worldwide continue to diversify their reserves.
We are not fanatical gold enthusiasts. But it is clear that the long-term factors driving prices up are not going to disappear anytime soon.
The world is more fragmented than it was a few years ago, and the dominance of the dollar is waning.
So what do people own instead? China is pushing for the international use of its yuan… and you can see a first hint of this in payment data. But it’s not a real alternative.
The only asset that every central bank in the world can hold without having to worry about who controls it is gold. Moreover, they are all convinced that gold will still have strategic value in 5, 10, 20 or more years.
Therefore, these central banks view a gold price of $4,000 as a reasonable entry point to build up further reserves, and they are unlikely to miss this opportunity.
