What do countries stockpiling gold determine the price of: Capital or fear?

Published 06.09.2019 01:49
Updated 06.09.2019 01:50

Financial literacy actually means the stance of the position you take against incidents that have materialized or will do so within a specific period. The New Yorker who works as an investor in the stock market, a woman who works for $8 per day for the continuity of the state in a remote Chinese village, and a Russian sailor who works in the mines of Novosibirsk and anchors in Vladivostok so that his products are sold on the Japanese coast, are all a piece of the globalized trade. We are all watching the results of financial and capital exploitation made by G8 members in the 1980s, thinking that it only concerned them. Countries with trillions of dollars of savings are too helpless and disconnected to collect just $20 million to save the Amazonian rainforest, considered to be the "Earth's lungs."

Just six years ago when you browsed prominent economy websites you saw that the news you came across would determine the investment and happiness index of the upcoming months. Those who think that an investment or financial expansion will only contribute to that company or the state bypass the behavioral economy theory. The same way you become a frequenter of a restaurant or a cafe when you consistently see a crowd in front of it when you pass by, you become a player of the financial expansion at some point to catch up with those who surpassed you by expanding the country's investment fields. Surely the issue I'm talking about is not only associated with the philosophy of the matter. Adam Smith expressed his thoughts regarding human feelings and actions in a book, titled, "The Theory of Moral Sentiments," published in 1759. According to Smith, the principle that determines human behavior is their tendency to share the pain and joy of others and make others a partner in their own joy and pain.

Applying this into the present economic atmosphere, we can think of it as the unemployment of nations and withdrawing into itself with the fear of facing trade sanctions by large countries. Your neighbor's distress starts affecting you at one point or another, regardless of how prosperous your country is. Of course the situation we're talking about involves relativity. More so, global central banks – considered to be the representatives of mainstream economy –have embraced Lionel Robbins' rational choice theory. For central banks, the main psychological factor is to remain as an "economic individual." Someone who can swiftly access information, who benefits their employer, pays taxes, acts rationally for their interests and desires to become wealthy. To maintain this idea, we need a world in which ethics is destroyed and class differences are heightened. Like Polish sociologist Zygmunt Bauman says, privileges and limitations, wealth and poverty, resources and helplessness, power and weakness, freedom and restrictions need to be re-ordered in order for this system to survive.

It did not seem like we would watch a happy ending movie with the global trade war launched by U.S. President Donald Trump in the past two years, China adding fuel to the flame, Russia's presence in Syria making the U.S. more tense, and the dangerous game played by Egypt and Israel in the Mediterranean. We referred to the yellow vest protests in France as a minor societal incident, while we saw Brexit as a trade gain and conceived the occupation of Ukraine as a show of strength, which is done by big states at times. We ignored what is going on in Hong Kong, saying that it is their internal matter. We considered Germany's idea to establish an army after World War II as a part of the natural process. We need to realize what will happen with all of these serious incidents, which took place in just a few years when they normally should have happened over two decades. There are two periods disliked by investors: The first is the cloudy water phase, while the second is the wavy water phase, in which you will not even have the power to set sail. You need to decide where we currently are now.

On one hand there are the type of investors who wait until the water calms down a bit, while it would not be appropriate to expect a natural flow amid money transactions of the middle income section who try to make money out of the speculations. At the end of the day, even though investors bear the brunt of the cost of money, states bear the heaviest brunt of the efforts and gains. The central banks, which represent the sharp edge of the sword have weapons of really low caliber. Central banks cannot accept deposit from the public when things go wrong and cannot distribute loans for as long as banks do not give consent. The only thing they can do is to play with interest rates, and if they lost hope about this then they would lean toward gold. It is a necessity for central banks to attempt to protect itself in the face of the scary points we mentioned before. Let us see if the numbers actually support what we've said.

According to a survey by the World Gold Council (WGC), the central banks of 11% of developing countries have expressed intentions to boost their gold reserves, at a time when gold demand reached 651 tons, reaching the highest level in the international economic system. Some 54% of all central banks in the world predict that there will be an increase in the gold reserves of central banks in the upcoming 12 months. The U.S. holds the world's largest gold reserves with around 8,134 tons of gold as of late July. U.S. gold reserves make up 74.5% of its total foreign reserves. Germany comes second with 3,368 tons of gold reserves making of 70% of its foreign reserves. The International Monetary Fund (IMF) comes third with 2,184 tons of gold, while Italy is fourth with 2,421 tons and France is fifth with 2,436 tons.

Turkey ranks 19th on this list with 303 tons. Turkey's gold reserves make up about 14.4% of its foreign reserves. Since January, Poland has increased its gold reserves by 99.5 tons, Russia 94 tons, China 74 tons, Turkey 60.4 tons and India 17.7 tons.

In conclusion, uncertainty caused by potential financial loss or the possibility of unwanted incidents taking place has significantly increased in the past years. Even though sectorial preferences vary, the main goal of the central banks is to optimize risk. I think industrial markets will be affected the most as risk contents in international markets are classified as systematic and non-systematic and the main section that will affect us will be caused by the market and policy risk. Considering that the main source of the growth rates is here, it looks unlikely for the world to return to the old days without real policy tensions easing.

* Ph.D. researcher in the Private Company Economic Research Department MENA at Swiss Business School

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