Officials of Italy’s populist government are floating the idea of selling off some of the country’s gold reserves to allay its debt problems. But gold bulls shouldn’t be concerned: for every distressed gold seller, there are plenty of central bank buyers.
The Italian noise is essentially a bit of political theater, designed by a populist government to open up a new line of attack on a central bank that it likes to style as serving the interests of German and French politicians rather than long-suffering Italians.
No one in the Rome government is suggesting selling the gold to cover the whole deficit. Even though Italy has more gold reserves than anyone except the U.S. and Germany, its holdings are barely 5% of its 2 trillion-euro public debt. The current burn in Italian debt would consume them in a matter of months.
Rather, the League party of deputy prime minister Matteo Salvini wants some help at the margin, to allow Italy to stay within European Union strictures on the deficit without unpopular decisions like raising the value-added tax or abandoning campaign spending promises.
They have hedged the proposition by saying it would require a “constitutional law”—entailing a particularly arduous legislative procedure—while at the same time saying that the gold reserves belong to the Italian people and not the central bank.
Whatever the ultimate motives in Italy, one thing is clear: the world’s central banks are going to be big net buyers of gold this year, just as they were last year. Central banks globally bought a net 651.5 metric tons in 2018, an increase of 74 percent from 2017, according to the World Gold Council.
If the big surge in gold after the financial crisis was due to fears that U.S. fiscal and monetary policy would debase the dollar, the world’s primary reserve currency, its main appeal these days appears to lie in providing insurance against the weaponization of the international financial system by the U.S.
According to the World Gold Council, the two biggest buyers in the first 10 months of last year were the central banks of Russia (451 tons) and Turkey (153 tons)—both of which saw their relations with the U.S. deteriorate sharply last year.
As the European Central Bank’s Benoit Coeure said in a speech in New York on Friday, “the prospect of being shut out of major financial systems makes fines or economic sanctions markedly more threatening.”
That angle adds spice to the fact that China, against the backdrop of a worsening trade war with the U.S., started buying gold again in December after a two-year hiatus, and continued buying in January. Unlike Russia, China’s overall foreign reserves have stopped rising, so it doesn’t have to keep buying just to keep the share of gold in its overall portfolio stable.
Gold may not be a foolproof geopolitical hedge, especially if, like Venezuela, you keep most of it in the vaults of the Bank of England, located in the capital of the U.S.’s closest ally. And the optics of transporting it out of your country at a time when many suspect you of preparing to flee might also be less than ideal.
But that won’t dim the appeal of gold to those who want to build a world financial system in which the dollar is less than almighty.