Could a gold backed cryptocurrency to settle international balance of payments be the reason why central banks are buying record amounts of gold?
On 10 June 2019 the People’s Bank reported that China’s national gold reserves grew by 15.6 tonnes in May to 1,916 tonnes. (And it’s highly likely that China is not revealing their true gold holdings – they’re likely much higher than the official figure).
Russia’s gold reserves have quadrupled in the last decade, making it the fifth-largest holder of gold in the world.
Last year, Russia dumped nearly $100 billion worth of U.S. Treasuries, and, according to the World Gold Council, replaced much of it with gold.
The chart below shows that since 2010 central banks have turned from net sellers of gold to net buyers. On top of this 2018 saw central banks purchase the most gold since 1971. The same year Nixon severed the last link from the US dollar to gold.
Back in 1971, central banks were scared the US was devaluing the dollar.
What Are Central Banks Scared of Now?
It’s likely they are looking for a hedge against the US dollar.
And also potentially to use gold as a means to avoid U.S. sanctions. You see, with the US dollar as global reserve currency the US government has the ability to restrict trading with any nation it so chooses.
Is This Why Central Banks Are Buying So Much Gold?
There could also be a plan to eventually topple the US dollar.
Legacy Research reports:
“Last week, the prime minister of Malaysia, Mahathir Mohamad, proposed a common trading currency for East Asia that would be pegged to gold.
Here’s how he put it at the Nikkei Future of Asia conference in Tokyo…
“In the Far East, if you want to come together, we should start with a common trading currency, not to be used locally but for the purpose of settling of trade. The currency that we propose should be based on gold because gold is much more stable.”
In short, more countries are turning their backs on the U.S. dollar. They’re moving to gold as an alternative international currency for trade.
… And Malaysia isn’t the only country looking for a new currency backed by gold…
Remember those big gold purchases Russia has been making?
Well, the rumors are that the Kremlin will use this gold to back a crypto version of the Russian currency, the ruble.
The Russian ruble by itself is a currency minnow. Russia’s economy is only 8% the size of the U.S. economy.
But a Russian cryptocurrency backed by gold would be different.
In 2009, Russia had about 600 metric tons of gold. Today, Russia has 2,183 metric tons – a 264% increase.
This gives Russia a gold-to-GDP ratio over three times that of the U.S.
And Russia is already considering a gold-backed crypto at the highest levels of power. As the head of the Russian central bank put it recently in a speech in Russia’s national parliament, the Duma…
“When it comes to international payments, we will of course consider [the] proposal… of gold-backed cryptocurrency.”
We don’t expect to see a gold-backed crypto ruble this year… or even next year. This plan is still in its early stages. But it’s not hard to see where this is headed.
China… Russia… Iran – and any other country that wants to avoid Washington’s economic warfare – will all gladly embrace digital gold as an alternative to the dollar.
And that’s a game changer for gold… and gold prices.”
What About Gold Backed Cryptocurrencies Already Available?
So Russia is considering the possibility of a gold backed cryptocurrency to settle balance of payments among nations. This plan is in its preliminary stages and is of course a long way from reality at this point.
Also the head of the Central Bank of Russia, Elvira Nabiullina, said:
“As for mutual settlements, we will consider, of course, a proposal on a cryptocurrency that is tied to gold. But, in my opinion, it is more important to develop settlements in national currencies.”
“[The CBR], in principle, are opposed to cryptocurrencies being launched into our monetary system. We do not see the possibility that cryptocurrencies, in fact, fulfill the function of monetary surrogates,” Nabiullina said. She noted, however, that the regulator could study the possibility of creating stablecoins while there is a real asset behind their provision.
Source.
But there are many gold backed cryptocurrencies in existence already. These aren’t for trading between nations but rather can be owned by anyone.
Currently there are 39 gold backed/linked cryptocurrencies in existence. With another 30 in development or soon to be launched.
However there are 17 in the “Crypto Graveyard” These were either cancelled, closed or didn’t meet funding.
Plus another 7 where their status is “unclear”. Many underwent an ICO (initial coin offering) and collected investors money. Since then their websites have gone offline with no updates.
For example:
“Thanks very much for all the ICO funds…we will try and launch Auric sometime before 2040. Have a great day. No more updates until then.”
Source.
In some cases the people behind these gold backed cryptocurrencies are being investigated for fraud. Unfortunately in other cases the parties behind the crypto were unknown. So participants in the ICO are unlikely to get anything for their money.
Related: Gold vs Bitcoin/Cryptocurrencies – Which Should You Choose?
What to Look for in a Gold Backed Cryptocurrency?
Just because something is purported to be backed by gold, it doesn’t mean it actually is. Like any investment you need to do your due diligence.
With gold backed cryptocurrencies, just like a share or stock, much rests on who the people are running it.
Particularly when buying an ICO in a gold backed cryptocurrency, you’re still guessing as to whether they will actually survive in the long run.
Which ones will win?
No one really knows.
Plus even if they do survive, you still have a counterparty involved in storage of the gold.
“While the blockchain accounts for the coins, accounting for physical stored gold is another matter. When evaluating such tokens look for who actually owns the gold and how it is stored.”
Source.
Sure you can speculate on gold backed cryptocurrencies. Just like you can speculate on cryptocurrencies in general.
[To learn more about our preferred way to invest in cryptocurrencies see:How to Invest in Bitcoin & Cryptocurrencies (it’s not only simpler and easier but cheaper too)].
But if you have wealth you wish to “ensure” or “insure” survives, our preference is to buy and hold physical gold. That way there is no counter-party involved. Gold is the only financial insurance.