Gold sell-off a sound investment for Canada: experts

[Royal Canadian Mint]

The Canadian government said this week it has sold off nearly all of its gold, the latest indication that the precious metal has lost some of its lustre as a solid investment.

The finance ministry said on Thursday that the gold stockpile held by the Bank of Canada have fallen to just 77 ounces, less than US$100,000 at today’s prices, after the sale of 21,851 ounces in February.

Gold was already a small part of the government’s piggy bank, known as its official international reserves. Canada actually added US$108 million to its overall holdings in the month, bringing its reserves to nearly US$81.3 billion.

Ian Nakamoto, director of research at 3Macs, said for long-term investors like the Canadian government, gold isn’t as attractive as interest-paying securities such as U.S. government bonds.

“Central banks around the world don’t always want to hold things that don’t have a return,” he said.

Before 1971, central banks held gold in part because of a direct relationship between its value and the American dollar.

But that link no longer holds, and both Canada and the Unites States have free-floating currencies where value is set by supply and demand in the markets and not pegged to any asset.

Gold expert Martin Murenbeeld, chief economist at Dundee Capital Markets, said this is the latest move in a 30-year gold sell-off by the Canadian government.

“Gold really doesn’t have any use in Canada,” he said. “For practical purposes, gold serves no direct function for the government nor the Bank of Canada.”

Gold’s purpose, he said, is to act as liquidity for a government — essentially, cash that it can use to buy foreign currencies or sell to fund deficits.

Yet in Canada, he said, we can access all the liquidity we need by buying U.S. debt from the American central bank, the Federal Reserve.

That borrowing has implications for the value of the Canadian dollar against the American greenback, he said, but the Bank of Canada doesn’t concern itself with foreign exchange.

“The theory is that if you have a free-floating currency, you don’t need any reserves at all,” he said.

February’s sale means Canada is now the only G7 country without a substantial gold reserve, according to The Canadian Press.

The only place gold is really needed, Murenbeeld said, is in the reserves of countries such as China and Russia that are important regional currencies and, for political reasons or otherwise, do not want to rely on American debt notes for their liquidity.

Those notes are accepted around the world, like gold, but are backed by the full faith and credit of the American government.

Allan Small, senior investment advisor at Holliswealth, said gold has become irrelevant to the world markets as the American economy and the American dollar have become more central to international trade and foreign exchange.

The modern era of currency trading began in 1971, when then president Richard Nixon said the U.S. would no longer allow the redemption of its currency for gold.

After that, gold became in effect an alternative investment to the greenback.

Gold is sold in American dollars. That means that, if the value of the American dollar goes up, the value of gold goes down — and vice versa.

Because the performance of the American dollar is tied to the performance of the American economy, those predicting an American downturn would buy gold.

“People buy gold when they think something bad is going to happen in the world economy, or they don’t believe the U.S. dollar is worth the paper it’s printed on,” Small said.

It also served as a refuge in times of trouble, most recently shooting above US$1,900 per troy ounce in 2011 during the aftermath of the financial crisis.

Now, Small said, America is recovering at a time when the rest of the world is still dealing with economic turbulence, meaning its debt is seen as a far more stable asset than the alternatives.

“If you’re going to own U.S. treasuries, it’s the safest asset class in the world,” he said. “From a volatility standpoint, why would you want to be in gold?”