Why Canada is dump­ing gold -- and China isn't

The Pak Banker - - OPINION - Stephen Mihm

CANADA, home to some of the world's largest gold-min­ing com­pa­nies, re­cently an­nounced that it had ef­fec­tively liq­ui­dated all of the coun­try's hold­ings of the shiny metal and is mov­ing to what a govern­ment spokesper­son de­scribed as "eas­ily trad­able" as­sets.

It has been a long process. Canada held 1,088 tons of gold in 1955. By 2000, it was down to 46 tons. To­day, just 77 ounces re­main. This puts Canada in last place in the most up-to­date com­pi­la­tion of data on gold re­serves com­piled by an in­dus­try group, the World Gold Coun­cil. In the Coun­cil rank­ings, Canada is now in last place, well be­hind Al­ba­nia, Haiti, Trinidad and Tobago, and Pa­pua New Guinea.

Canada's ex­pla­na­tion for the sell­off is rea­son­able enough: Ac­tual bul­lion bars can­not be liq­ui­dated as eas­ily as, say, govern­ment bonds. And over the long term, cen­tral banks and gov­ern­ments have gen­er­ally got­ten a bet­ter re­turn by in­vest­ing in safe as­sets such as U.S. Trea­suries. But the real ques­tion is not why Canada has sold its gold; it's why other coun­tries re­main so wed­ded to main­tain­ing -- even ac­cu­mu­lat­ing -- stocks of the pre­cious metal de­spite the fact that it no longer plays any role in the money sup­ply.

The rea­son some coun­tries hold on to gold may have lit­tle to do with sound fis­cal pol­icy. In­stead, the prac­tice re­flects the less tan­gi­ble or ra­tio­nal weight of his­tory. A look at which coun- tries own the metal -- and which coun­tries do not -- presents an un­ex­pected pat­tern. Coun­tries that pos­sess sig­nif­i­cant re­serves tend to have some his­tory as global hege­mons, im­pe­rial pow­ers or eco­nomic pow­er­houses -- or as­pi­ra­tions to such sta­tus.

In a fas­ci­nat­ing pa­per from 2012, two econ­o­mists at the Univer­sity of Santa Cruz -Joshua Aizen­man and Kenta Inoue -crunched some num­bers and found that "the in­ten­sity of hold­ing gold is cor­re­lated with 'global power' -- by the his­tory of be­ing a past em­pire." This, they said, is es­pe­cially true of "coun­tries that are or were the sup­pli­ers of key cur­ren­cies." The U.S. re­mains No. 1, just as it re­mains the world's big­gest econ­omy and the is­suer of the most com­mon re­serve cur­rency. But the pat­tern reaches into the dis­tant past. The Nether­lands was an im­pe­rial heavy­weight in the 17th cen­tury, but it lost that sta­tus long ago. None­the­less, it holds the 10th largest gold re­serves, even though it has a pop­u­la­tion of only 17 mil­lion.

Por­tu­gal, a coun­try that once pos­sessed an em­pire that stretched from Brazil to An­gola to Ma­cau, has 382 tons of gold, yet only has a pop­u­la­tion of about 11 mil­lion. The bet­ter­known im­pe­rial pow­ers -- Ger­many, Italy, France, Rus­sia, and of course, the U.K., all have gold hold­ings in the global top 20.

The trend ex­tends be­yond Europe. Ja­pan, which sought to con­quer much of the Pa­cific in the 20th cen­tury, and later be­came the world's se­cond-largest econ­omy, is ranked No. 9 in gold hold­ings. Tai­wan, which be­came an eco­nomic pow­er­house in the se­cond half of the 20th cen­tury, is ranked 14.

Like­wise, Euro­pean pow­ers with­out a sig­nif­i­cant his­tory of im­pe­rial am­bi­tion don't seem to have much in­ter­est in gold. Fin­land, for ex­am­ple, is stuck be­tween Ar­gentina and Bo­livia in its cur­rent hold­ings of gold. Ire­land is even lower, sand­wiched be­tween Latvia and Lithua­nia. Th­ese na­tions are used to liv­ing in the shadow of a much big­ger im­pe­rial power, and share a com­mon his­tory of hav­ing been con­quered by those big­ger neigh­bors.

But there are new­com­ers in the top 20, too. As Aizen­man and Inoue point out, it's no ac­ci­dent that two coun­tries that have moved from bit play­ers to pow­er­houses have been buy­ing up gold. China is now ranked No. 6, hav­ing ac­cu­mu­lated 1,762 tons. In­dia is ranked No. 11, hav­ing amassed 557 tons.

China and In­dian's gold re­serves, the re­searchers note, "in­creased in tan­dem with the sharp rise of their eco­nomic power." In other words, they're the lat­est coun­tries to buy into an un­spo­ken dogma that if you're go­ing to be a heavy­weight, you need some heavy metal. Which brings us back to Canada. It has been the play­thing of em­pires, but has never har­bored im­pe­rial am­bi­tions of its own. And its pol­icy mak­ers have never felt a need to pro­claim their great­ness by ac­cu­mu­lat­ing piles of gold. As they would say to the rest of us who cling to this im­pe­rial relic: it's all in your head.

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