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The Search For “Cash”



-- Posted Friday, 11 June 2010 | | Source: GoldSeek.com

Last week, rumors surfaced that China was considering the reallocation of its foreign exchange reserves away from Euros.  Although China denied the rumors, China has made changes to its reserve holdings in the past.  China’s historical willingness to adjust the mix of its currency reserves is a microcosm of the difficult search that people and central banks are undergoing to find a risk-free store of value for their savings.  

Earlier this year, we published Foreign Exchange Reserves Are Concentrated In Weak Currencies”.  Below are updated figures from that note showing that for several years, China and other countries have been reallocating their foreign exchange reserves away from Dollars and predominantly into Euros.  The decrease in Dollars as a percentage of foreign exchange holdings confirms that the Dollar’s role as a reserve currency is in doubt.  Now that the Euro is also losing credibility, the world is left with few options for safely diversifying its savings.

Figure 1. Total Foreign Exchange Holdings (in millions of U.S. Dollars)

Source: IMF

Figure 2. Composition of Allocated Reserves

Sources: IMF, Continental Capital Advisors

People and central banks hold cash (foreign exchange reserves) for the proverbial rainy day.  Although cash can fluctuate in value relative to other assets or goods, the viability of cash should never be questioned.  However, central banks are questioning fiat currencies. As such, some central banks have begun to accumulate gold, suggesting that they recognize gold as a trustworthy form of cash (Figure 3). 

Figure 3. Largest Increases in Gold Holdings Since 2001 (tonnes of gold)

Sources: IMF, World Gold Council, Continental Capital Advisors

Conversely, Figure 4 lists the countries with the largest decreases in gold holdings since 2001.  Many of these countries unwisely sold their gold to buy paper assets, such as sovereign debt, or to fund government deficits.  However, gold sales have slowed during the decade, which is further evidence that gold is starting to be recognized as a currency even at the government level. 

Figure 4. Largest Decreases in Gold Holdings Since 2001 (tonnes of gold)

Sources: IMF, World Gold Council, Continental Capital Advisors

Historically, risky times meant one should reduce holdings of financial assets while increasing one’s cash position. In the past, that form of cash was the Dollar or other paper currencies.  Today, risk is prevalent yet both the Dollar and the Euro are in doubt, which leaves few options for preserving one’s wealth.  As such, the recognition of gold as a form of cash will continue to increase. 

Daniel Aaronson - daaronson@continentalca.com
Lee Markowitz - lmarkowitz@continentalca.com
 
http://www.continentalca.com
 

Continental Capital Advisors, LLC

Continental Capital Advisors, LLC was formed to offset the destruction of wealth caused by the global devaluation of currencies by central banks. The name Continental Capital symbolizes the 1775 US Currency, "the Continental", which was backed by nothing and quickly became devalued.

Disclaimer: The above is a matter of opinion and is not intended as investment advice.  Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities.  Certain statements included herein may constitute "forward-looking statements" within the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any action taken as a result of reading this is solely the responsibility of the reader.


-- Posted Friday, 11 June 2010 | Digg This Article | Source: GoldSeek.com




 



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