The process of Russia and China reducing holdings of U.S. Treasury securities and buying gold is old news. Russia has tripled its gold reserves in the past 10 years, has over 2,000 tons and has a gold-to-GDP ratio that is four times the U.S.’ ratio.
China has also tripled its official gold reserves in the past 10 years, but may have far more gold “off the books” inside a secretive state-controlled entity called the State Administration of Foreign Exchange (SAFE). Other countries including Vietnam, Mexico, Kazakhstan, Poland and Hungary have increased gold reserves.
Now there’s a new member of the “Dump Treasuries/Buy Gold” club. The new member is India. The amounts involved are relatively small according to this article, but that’s how these trends begin.
Countries such as Russia, China and India do not actually sell many U.S. Treasuries. What they do is receive cash as existing Treasury notes mature and then reinvest the cash in other asset classes, such as gold. The net effect is the same as selling Treasuries, but the option not to roll over maturing securities is less disruptive to the market.
With both India and China in the game, almost half the world’s population live in countries that are favoring gold over Treasuries at the margin. This is not an end-of-the-world scenario (yet). There are plenty of buyers for U.S. Treasuries, starting with U.S. mega-banks (who will do what the Treasury demands) and including the Fed (who will do whatever it takes to avoid market disruption).
The impact on Treasuries from India’s actions is to cause slightly higher interest rates, although other factors, including a slowing U.S. economy, may push interest rates lower. The impact on gold is likely to be more significant because that market is smaller and physical output is flat, so increased demand tends to push the dollar price of gold higher.
This development in India is another straw in the wind as a major country jumps on the gold bandwagon.
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