ETF gold holdings and World Official gold reserves total about $USD 2.3 Trillion in value. The total amount of US dollar debt outstanding is $27.7 Trillion, a rise of about $15 trillion since the GFC. With claims on the US Government and Gold both being considered a risk free asset by the Bank for International Settlement, you will need to decide which risk free asset is more likely to hold its value, relatively speaking.
A new Bretton Woods moment
A significant speech was made by the International Monetary Fund’s Managing Director, Kristalina Georgieva in October 2020. She said, “Today we face a new Bretton Woods “moment.” A pandemic that has already cost more than a million lives. An economic calamity that will make the world economy 4.4 % smaller this year and strip an estimated $11 trillion of output by next year. And untold human desperation in the face of huge disruption and rising poverty for the first time in decades.”
“That includes keeping a careful watch on risks presented by elevated public debt. We expect 2021 debt levels to go up significantly – to around 125 per cent of GDP in advanced economies, 65 per cent of GDP in emerging markets; and 50 per cent of GDP in low-income countries.”
The original Bretton Woods agreement in 1944 was where the World responded to the devastation caused by the War. They made the American dollar (backed directly by gold) the World’s reserve currency. America unilaterally abandoned the gold standard in 1971 after its gold reserves were drained by other countries. Other countries were fearful of America’s massive increase in debt, switching their US dollars for gold. Commentators, especially gold bulls, therefore interpreted IMF’s Kristalina Georgieva recent speech as a possible return to a gold standard.
America’s accelerating public debt is only enabled by its status as the World’s reserve currency, not by the soundness of the country’s financials. The IMF recognises the risk the increasing debt places on the stability of the financial system, but it is unlikely that there will be a return to a gold standard, in part due to the fact that there is not enough to support World trade.
In the realms of possibility is that gold may be part of the solution that includes a basket of commodities/currencies replacing the sole use of the American currency as the World’s reserve asset. The move by the BIS to make gold the same status as the American currency is certainly a move in that direction, together with the recognition from the IMF that things need to change.