In an unprecedented move from our neighbors to the north, the Canadian government has recently made the decision to sell its remaining stock of gold reserves. Granted, the total gold reserves remaining at the beginning of February of this year were only 1.7 tonnes; however, to our knowledge, no other modern developed nation has completely divested itself of its gold holdings. This comes at an interesting time, as the Canadian dollar has struggled as of late in the foreign exchange markets; most notably against the dollar, which we highlighted in a recent post. As many of our readers know, the last nation to remove its currency from the gold standard was the United States in 1971. However, most countries still maintain a percentage of their reserves in gold, as gold has been used as money for thousands of years and helps to give their citizens some sense of comfort that there is at least an implicit gold backing to their currency. In this article, we’ll discuss three potential issues with Canada’s most recent decision.
Canadian Gold Maple Leaf Coins
If you’re in the coin or bullion industry, as we are, your first thought is probably “what will become of the Canadian gold maple leaf coin?” At the time of this writing, that remains to be seen. We have sent the following message to the Royal Canadian Mint and will share with our readers the Mint’s response, assuming we receive one: “My name is Tony Davis with Atlanta Gold & Coin Buyers. I recently read that the Canadian government completely sold out of its stock of gold reserves and would like to know how this is expected to impact the production of Canadian gold maple leaf coins? I know that Canada is one of the world’s largest producers of gold. Do you anticipate on meeting future gold coin demand through newly minted gold, scrap or just simply reduce or eliminate the production of gold maple leaf coins?” If the Royal Canadian Mint is required to only use gold mined from Canada in the production of gold coins, the only possible source will be from newly mined gold, as scrap gold may be from other countries. If the production of gold maple leaf coins is reduced, or eliminated altogether, we predict that in time the American gold buffalo will become the most popular 24k gold coin.
Strength of Currency
As we noted above, and as we highlighted in our previous post, the Canadian dollar has been a relatively poor performer in the foreign exchange markets and has lost a substantial amount of ground to the U.S. dollar in recent years. While the Canadian dollar has experienced a bit of a rally over the past month with an exchange rate to the U.S dollar of .75 to 1, there’s still cause for concern. The Canadian dollar is a commodity based currency, which means that it is closely tied to the strength of the commodities market, or lack thereof. The commodities market overall has struggled in recent months, with the exception of precious metals. Additionally, there are concerns that the global economy may slip into a recession. In fact, some countries and central banks are currently in a recession or on the brink of one, and have gone so far as to introduce negative interest rates in an attempt to stimulate spending. This of course devalues the currency, which will make it difficult to rebound from a severe downturn in the economy. The mere presence of gold reserves can help to alleviate the fear of a collapsing currency. As of February of this year, Canada no longer has this implied safety net. Of course, the government could always impose draconian measures on its mining companies, by requiring all future gold mined in Canada to remain in Canada, but by the time the gold is needed, it will likely be too little, too late.
Gold Backed Currency
It has been 83 years since Canada abandoned the gold standard, but hard money advocates and free market proponents are hopeful that Canada, as well as all major developed nations, will once again return to a gold back currency. The last country to abandon the gold standard was the United States in 1971. Up until 1971, central banks were able to redeem their dollars for gold at $35 an ounce. In this writer’s opinion, it’s highly unlikely that any major country, including Canada, will voluntarily return to a gold standard because it requires restraint and fiscal responsibility. Rather, only when faced with the near certainty of a collapse and destruction of their currency will they reluctantly agree to return to a gold backed currency. Of course, countries, such as China and Russia, who have been accumulating gold reserves at a rapid pace, will be in the cat bird’s seat. Canada and other major developed nations with little to no gold holdings will be at a major disadvantage in such a scenario. Presumably these nations are convinced it’s unlikely that they’ll ever need to return to a commodity-based standard. However, assuming that the efforts by central bankers around the world fail to lift their respective countries out of a recession, you can be assured that countries will continue to devalue their respective currencies in an attempt to increase exports and stimulate growth. This could eventually lead to a full-blown currency war, which could necessitate a return to the gold standard.
In conclusion, Canada’s liquidation of their gold reserves is reason for concern. From the coin and bullion perspective, it raises questions as to if or how it will impact the production of Canadian gold maple leaf coins; the most popular 24k gold coins in the market. Secondly, the Canadian dollar has been a relatively weak performer in the foreign exchange markets, which won’t be helped by the divestiture of the country’s gold holdings. Lastly, if we experience a global currency war, which is not out of the realm of possibility, and are forced to once again adopt a gold standard, how will Canada’s currency perform in light of the fact that their gold reserves have been sold? Only time will time with respect to the currency-related questions. However, we’ll be sure to update our readers once we receive a response from the Royal Canadian Mint on the production of Canadian gold maple leaf coins.