Commodity Trade Mantra

Foreign Central Banks Dumping US Debt & Buying Gold at Alarming Pace

Foreign Central Banks Dumping US Debt & Buying Gold at Alarming Pace

Foreign Central Banks Dumping US Debt & Buying Gold at Alarming Pace

Continuing a trend that started last year, central banks around the world are dumping US debt at a record pace.

Central banks sold off a net $17 billion in US Treasury bonds in March. Sales set a record in January, hitting $57 billion. China, Russia, and Brazil led the way, each dumping at least $1 billion in US debt in March alone.

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So far in 2016, global central banks have jettisoned $123 billion in US debt. Last year, they sold off $226 billion. According to the Treasury Department, central banks are selling US Treasuries at a pace not seen since at least 1978.

Once the biggest buyer of US debt, China is now selling Treasuries at what CNN calls an alarming rate:

Between December and February, China’s central bank sold off an alarming $236 billion to help support its currency, which China is slowly letting become more controlled by markets and less by the government. In March, China sold $3.5 billion in US Treasury bonds, Treasury data shows.”

Head of international fixed income at Federated Investors Ihab Salib said fear and economic instability is driving the selloff:

There’s still this fear of ‘everything is going to fall apart.’”

CNN Money said the selloff of Treasuries may be an effort to “prop up their currencies:”

By selling US debt, central banks can get hard cash to buy up their local currency and prevent it from losing too much value.”

But many of these central banks aren’t just purchasing local currency. They are buying gold.

As we reported yesterday, central banks have gone on a gold-buying spree, with China and Russia leading the pack. According to the World Gold Council, Russia increased its gold reserves by 45.8 tons in the first quarter of this year. That was 52% higher than the same period in 2015. China purchased 35.1 tons between January-March, adding to the 103.9 tons it bought through the second half of last year.

Notice these are two of the countries dumping US debt the fastest. The strategy seems pretty clear – sell US treasuries and keep buying gold.

This makes sense in a world of perpetually low and even negative interest rates, coupled with rampant economic uncertainty and a looming recession. The yield on Treasuries and other sovereign debt becomes less and less attractive in a low-rate environment.

So, if central banks are dumping US Treasuries, who’s purchasing them? It appears US and foreign firms are the primary buyers. This seems to indicate the private sector is not buying all of the sunshine and roses Washington is selling when it comes to the US economy and is seeking the “security” traditionally offered by US government bonds. Last fall, Casey Research analyzed the current dynamics in the bond market and reached a similar conclusion, reporting “looming warning signs” in the US “wonderland economy.”

The Federal Reserve and US government central planners have built a house of cards on a foundation of debt . What is going to happen when nobody wants to buy US Treasuries anymore? Will the house of cards eventually come crashing down? Perhaps that is the real fear driving countries like Russia and China to dump US debt and keep buying gold.

 

 

 

Courtesy: Samuel Bryan

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request your views on the above article

  • Guy Christopher

    If you think bond and stock market turmoil is afoot now, be prepared when Donald Trump wins the White House in November. International markets will be quite unpredictable, including the gold market. Trump has said he will renegotiate US debt (stiff some bondholders?), rewrite long standing int’l deals which he believes are bad for the US (and he’s right), and pull troops and billions in foreign aid from foreign governments that do not share the costs of their survival. Looks to me like good for turmoil and good for gold.

  • With US Treasuries paying near zero, what difference does it make if anyone buys them? Nothing is going to stop the Fed from creating more money. We already have racketeering laws to confiscate any stockpile of money on mere suspicion thanks to the war on drugs.

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