The Asymmetric Gold Trade
Central banks have played a significant role in driving up gold prices in recent years. A 9.0% increase in central bank holdings of gold has been observed, with the majority of this growth concentrated in Russia and China.
The Central Bank Gold Reserve Growth
- Russia: 600 metric tonnes in 2008 to 2,335 metric tonnes today, a gain of 1,735 metric tonnes or nearly 300% from the 2008 base.
- China: 600 metric tonnes in 2008 to 2,280 metric tonnes today, a gain of 680 metric tonnes or 113% from the 2008 base.
These increases in central bank gold reserves have been attributed to the perception that gold is a monetary asset, despite not being used as a primary store of value. Central banks have been actively buying gold, which has put a firm floor under the dollar price of gold.
The Asymmetric Trade
The asymmetric trade is a concept that refers to the market dynamics created by central bank gold buying. On the upside, the potential for gold prices to rise is unlimited, but on the downside, central banks have the potential to buy gold during dips, thereby supporting the price. This dynamic creates a floor under the gold price, as central banks are willing to buy gold when prices drop. This, in turn, makes the market more volatile, as investors must contend with the possibility of central banks intervening in the market.
The Role of the BRICS Countries
The BRICS countries, which include Brazil, Russia, India, China, and South Africa, have been actively promoting the use of gold as a medium of exchange and store of value. The BRICS have been developing a system of gold-backed currency settlements, which would allow countries to settle trade surpluses and deficits without relying on the US dollar.
| BRICS Countries | Current Gold Reserves | GDP Contribution |
| Brazil | 200 metric tonnes | 5.6% |
| Russia | 2,335 metric tonnes | 11.2% |
| India | 600 metric tonnes | 7.1% |
| China | 2,280 metric tonnes | 14.3% |
This system would allow countries to settle trade surpluses and deficits without relying on the US dollar, thereby reducing the need for foreign exchange and currency reserves.
Benefits for Gold Investors
The BRICS and other countries will have to acquire gold in order to participate in this system. This means that gold investors will be along for the ride, as these countries will be increasing their gold holdings. This increase in demand for gold will likely lead to higher prices, making it an attractive investment opportunity for those who believe in the potential for gold to rise in value.
Conclusion
The asymmetric gold trade is a complex market dynamic that is driven by central bank gold buying. The BRICS countries are promoting the use of gold as a medium of exchange and store of value, which could lead to a significant increase in gold prices. As gold investors, we should be aware of this dynamic and be prepared for the potential for gold prices to rise. With the BRICS and other countries increasing their gold holdings, the market is likely to become even more volatile, making it an attractive investment opportunity for those who believe in the potential for gold to rise in value.
