January 30, 2012
Nassau, Bahamas

Here’s something unexpected. According to IMF data, the central bank of Kazakhstan recently purchased 3.1 metric tons of gold, increasing its reserves by 4.2%. In an even more stunning development, Mongolia’s central bank purchased 1.2 metric tons, increasing its reserves by a whopping 52%.

To be fair, 4.3 metric tons of gold is not much. At current market value, it’s around a quarter of a billion dollars, just a small fraction of last year’s worldwide gold production. It is an interesting, trend, though.

Years ago, most radidly developing countries enjoying their first taste of wealth would have been more than happy holding dollars. Today, it’s becoming obvious to everyone that sitting on a bunch of worthless fiat paper does not make a sound balance sheet.

Over the years, central banks have managed to accumulate trillions of dollars worth of foreign reserves, the vast majority of which is in dollars, euros, and yen.  This is a big problem. Asset managers (including central banks) need a reasonable store of value to hold their cash and reserve funds, and none of those three is a good option.