Some words on the Federal Reserve Bank: From the Financial Times:
‘A top Federal Reserve official has warned that the US central bank’s emergency bond-buying programme is ill-suited for an economy held back by supply constraints, urging instead a speedy end to the stimulus to avoid burdensome debts and inflationary pressures.
‘Eric Rosengren, president of the Boston Fed, told the Financial Times that he would support the central bank announcing next month that it would begin to wind down or “taper” its $120bn in monthly asset purchases this autumn and get on track to halt them by the middle of 2022.’
US retail data wasn’t strong: Worth noting is retail data in the US is weak. Americans are spending less. The jury is out on what is behind slowing discretionary consumption in the US. Though speculation mounts it’s is the delta variant of Covid making people more cautious as uncertainty remains.
- August 2021 US retail data will be a better gauge of consumption as this is America’s ‘back to school’ shopping month.
- Consumers make up 70% of the US economy. Their spending matters greatly to the health of the US.
50 years without an anchor
We passed a dubious milestone this year.
The 15th August 2021 marks the 50th anniversary of President Richard Nixon ending the convertibility of US dollars into gold. In markets this event is colloquially known as ‘ending the gold standard’.
The Bretton Woods agreement wasn’t a traditional gold standard, gold acted more like an anchor to a monetary system.
A true gold standard is where a country’s currency is linked to the value of gold, but the value of gold is floating, and its value reflects economic activity.
The Bretton Woods agreement however, saw the value of gold per ounce fixed to one US dollar. Other currencies were then pegged to the value of the greenback. This enabled countries to trade using their fiat dollars, with the knowledge they could exchange US dollars for gold at any time. Bretton Woods was meant to ensure exchange rate stability for international trade.
While many gold proponents commiserate the end of Bretton Woods, it’s worth remembering that it came with a ban on private ownership of gold. Nixon ending the Bretton Woods agreement allowed physical ownership of gold for the first time in decades.
The demise of Bretton Woods is a fascinating look at monetary history and deserves more than a couple of paragraphs. Here is a short synopsis of the forces that lead Nixon to closing the window.
Central banks are net buys of gold
Central banks are back as gold buyers. The Reserve Bank of India (RBI) purchased 29 tonnes of gold in the first half of 2021, bringing their total gold holdings above 700 tonnes for the first time. This equates to a 27% increase in the last two years for the RBI.
Similarly, Banco Central do Brasil (BCB) — the central Bank of Brazil — is another major buyer of gold, adding 62 tonnes of gold in the last three months. Bringing their gold foreign reserve position to 130 tonnes, a very large 92.4% increase in their holdings. This is the BCB’s first purchase since November 2012.
The World Gold Council notes that central banks are likely to remain net buyers of gold for the rest of 2021, writing:
‘Central banks are likely to continue buying gold on a net basis in 2021 at a similar or higher rate than in 2020, driven by a continued focus on diversification and risk management.’