Canada Sells Off All Its Gold

For some reason, our mild-mannered neighbor to the north has been steadily reducing its gold reserves since the middle of 2011. But recently Canada has divested itself of virtually its entire reserve and, according to a government report last Thursday, rendering itself effectively gold-free. Reportedly Canada’s gold has been replaced by bundles of currency from the U.S. and other countries.

Weirdly, the government has tried to position the move as simple diversification.  According to a Department of Finance spokesperson:

“The [Canadian] government has a long-standing policy of diversifying its portfolio by selling physical commodities (such as gold) and instead investing in financial assets that are easily tradable and that have deep markets of buyers and sellers.”

Really? So who bought all that gold?

Data from the World Gold Council now indicates Canada is the only G7 country with no gold reserves. In a move that showed how financially savvy they really are, Canada sold off the last of its gold reserves in February, in the midst of some of the most disturbing market unrest in years, and right as gold prices were beginning to take off.

Timing is Everything

Even if one could accept the logic of Canada selling its gold in exchange for worthless paper, you would still question their timing. The Canadians started selling the last of their gold reserves during a long price slide prompted by a strong dollar. In other words, Canada sold an undervalued asset and used the proceeds to purchase a vastly overvalued asset. Over the years we’ve laboriously established that common sense is not a requirement for running a central bank.  But every so often a nation runs so far off the trail that even we’re surprised. For an institution with the stated purpose of “enhancing returns” of the country’s assets, that was a loser trade.

Not How You Get Ahead

If you’re trying to maximize the asset value of your portfolio, then investing in currency is a really bad idea. The world is engaged in a global race to the bottom on currency valuations. The nations with the weakest currency have the most favorable exchange rates and that makes goods produced in those nations cheaper in world markets. By devaluing its currency, a country can frequently experience economic growth in the form of increased manufacturing. You can see that illustrated perfectly in the behavior of Japan.

Japan’s been dumping money into its own economy on a massive scale in an attempt to devalue its own currency. To keep that cash flowing in the economy, Japan’s combining stimulus with negative interest rates. In simple terms, their central bank, the Bank of Japan, is printing massive quantities of cash and then penalizing savers for putting any of it away for an emergency. If Japan were the only country doing it, the rest of us could just point and laugh. But  Japan got the idea from the European Central Bank and the central banks of a handful of other small European countries. In effect, Japan gave the volatile combination of stimulus and negative interest rates a try because all the cool kids in Europe were doing it. But what’s hard to grasp is that supposedly sensible Canada, from a 5,000 mile vantage point, decided investing their nation’s wealth in that kind of currency madness would be better than holding on to their gold.

A Smarter Plan

A country that controls its own money supply is able to print more money to meet emergencies; it can, literally, paper over its mistakes with money. You and I can’t do that, we have to actually be responsible investors. Being responsible means understanding that you use gold to hedge the buying power of your currency. This ultimate liquid hard asset will hold its value, even if irrational currency policies reduce all paper money to trash; a fact that has held reliably true for centuries.

The last official total indicates the government of Canada is down to just seventy-seven ounces of gold, roughly $130,000 in gold coins. Some of our readers now have more gold than the government of Canada; a fact that clearly shows who is the wiser investor.