Why should you become your own central bank? Does it depend on how much gold your own home country’s central bank holds? You’ll discover the answer in this article. Along with other ways to mimic central banks in protecting your finances.
How much gold does the New Zealand central bank hold? We’ve answered this question before. See: How Much Gold Does the Reserve Bank of New Zealand Have?
We’ve also commented on the state of Australia’s gold reserves. See: Australia has 80 Tonnes of Gold, How Much Gold Does New Zealand Have?
To summarise both of those. Australia sold most of their reserves in 1997. The Reserve Bank of New Zealand sold every last ounce of its gold in 1991.
In our post, How Much Gold Does the Reserve Bank of New Zealand Have? we argue, “the RBNZ would be wise to convert some of its foreign currency reserves into real money to ensure a store of value in a time when currencies the world over are being depreciated at ever greater speed.”
Would it Help its Citizens if a Central Bank Has Gold Reserves?
So how would a country fare if their central bank held a decent portion of currency in the form of gold reserves? Would it help its citizens in times of crisis and strife?
Adrian Ash has commented in detail on this very topic. The conclusions are quite revealing. He looks at the Turkish central bank and a big policy change it made in late 2011.
“The TCMB bank began allowing commercial banks to hold a portion of their ‘required reserves’…needed to reassure creditors that they have plenty of money to hand…in physical gold bullion.
Private citizens were similarly encouraged to hold their gold on deposit with their banks. That gold was thus transferred to the central bank’s balancesheet.
Bingo! Privately-owned gold now backed the nation’s finances.
“This smart idea,” we wrote in 2012, “has coincided with Turkey’s currency rising, interest rates falling, huge current-account deficit shrinking, and government bonds regaining ‘investment grade’ status.”
But no! We spoke too soon…and not for the first time.
Because the pile of gold put on deposit by private households…and counted as ‘national’ by the central bank…has only helped Turkey’s financial sector boost its reserves with the central bank.
That has stabilized the banking sector’s balance-sheet, at least on paper.
But it has done nothing to boost the country’s ability to repay its national debt or meet its huge import bills and financial outflows to the rest of the world.
“A lot of Turkey’s reserves are in gold and thus not in Dollars or Euro,” says this blog from the US Council on Foreign Relations.
“Turkey’s debts though don’t settle in gold.”
What’s more, “Most of the gold…is effectively borrowed [from household depositors]. That limits the pool of funds available to intervene directly in the foreign exchange market.”
Hence the failure of Turkey’s “national” gold to stop disaster hitting its currency…the Lira…yet again in spring 2018.
Bottom line? Gold has indeed worked wonders for Turkish savers and investors.
More than quadrupling over the last decade, it has even outpaced the speculators’ usual inflation favourite, the stock market.
But a good part of that is because the Lira has sunk on the currency market.
And all of the TCMB’s gold reserves have failed to help defend the TRY’s value.
Upshot? As Bloomberg also noted last week, private household demand for gold has been rising.
If you think you need a little gold to help protect your savings, don’t expect your government’s gold reserves to do it for you.”
We’ve written previously, that the advantage of a central bank holding gold, is that it gives that nation a “seat at the table” if and when the global monetary system rules are reset. See: Why New Zealand Won’t Have Any Say in a Global Currency Reset
But the lesson above from Turkey is that gold listed on a government or central bank balance sheet, won’t necessarily be of any help to private citizens.
However, gold held directly by private citizens in Turkey has helped protect them from their national currency plunging in value.
So in short, become your own central bank. Ensure you have some gold reserves to protect you from currency devaluation and loss of purchasing power.
Other Ways to be Your Own Central Bank
While central banks may seem like they implement crazy policies a lot of the time, we can still learn a thing or two from them. Particularly those central banks in the east. Here are some other ways you can be like a central bank when it comes to your finances:
- As already stated own some gold, just like most major central banks do. Gold acts as a reserve and protects your purchasing power over time.
- Purchase gold regularly and over time to give you a good overall price. This is what the likes of the Chinese and Russian central banks have been doing for many years.
- Hold assets internationally. Consider having a foreign bank account or even storing some gold offshore. Hold cash reserves also. We’ve previously written about a system failure at the BNZ and how this highlighted the need to keep some cash on hand.
See what gold products are available to purchase for your own central bank gold reserves here: Buy Gold
You might also want to consider some silver as well as gold. See: What Use Will Silver Coins be in New Zealand in a Currency Collapse?>>
Editors note: This post was first published 6 June 2018. Updated 10 December 2019.