Thursday, May 5, 2011

Mexico Buys 100 Tons of Gold in First 4 Months of 2011

Here's another story on Mexico.

In 1521, Hernán Cortés, the Spanish conquistador, conquered the Aztec empire which encompasses modern day Mexico. Over the ensuing centuries, the Spanish crown systematically looted the land of its gold and silver reserves.

Fast forward to today. In a surprise announcement, the Mexican government revealed on Wednesday that they had been slowly acquiring a substantial horde of gold bullion. The sheer amount of gold bars is enough to rival the Aztec treasures of old - more than 100 tons of gold w/an estimated market value of $4 billion.

While the number of gold bars is enough to raise eyebrows, of more importance is Mexico's proximity to the USA. Mexico is America's second largest trade partner w/an economy highly linked to the dollar. As a developing nation largely dependent on exports and tourism to support its economy, Mexican authorities had built a substantial foreign reserve horde that enabled them to systematically sell the peso against the dollar.

Nor is Mexico the only country to do so. China, India, Russia, Kuwait, Saudi Arabia, and (to a lesser extent) Brazil, have been incorporating more gold into their central reserves.

However, there is an important distinction to note. The above countries are all DEVELOPING states, which is a broad term and somewhat politically loaded; but for purposes of this discussion mean their primary source of GDP growth is centered on exports. Central banks in such countries acquire foreign reserves to manipulate exchange rates thereby keeping exports cheap for Western consumers. Authorities have generally refused to comment on the official reasons behind their purchases but are widely believed to have done so for diversification away from the dollar and the inevitable debasement into inflation being wrought by America's uncontrollable spending spree.

Other countries, particularly DEVELOPED states such as the UK or more tellingly, Japan, have smaller gold reserves. But they are not necessarily buying gold either. Instead, these states tend to have well established links w/the Federal Reserve in the form of dollar swaps. These swaps are there not for currency manipulation but to pursue Keynesian monetary policy, aka money printing to support capital markets and failed bankers. This is not a specious charge. Major swap partners include Japan w/its notoriously underwater real estate market that has still not recovered from its 1980s highs. Another notable example is the EU w/its plethora of PIIGS peripheral (impending) sovereign bond defaults.

The bottom line: Developing countries such as Mexico have been acquiring gold bullion as a diversification against the dollar and inflation. But developed states have no reason to do so, instead relying on dollar swaps w/the US Federal Reserve to achieve their Keynesian goals of propping up underwater loans and mortgages.
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