In December 1916, with German and Austro-Hungarian armies closing in on Bucharest, the Romanian government made a decision that must have felt entirely sensible at the time.
Romania had gambled its way into the Great War a few months earlier, sending its army across the Carpathian Mountains to grab Austro-Hungarian Transylvania, believing that Germany and Austria-Hungary were too exhausted to stop them.
But Romania’s gamble fell apart in weeks. German and Austro-Hungarian were exhausted. But not so exhausted to allow Romania to waltz across the border and grab territory uncontested.
The Central Powers quickly reacted, beat the Romanian army all the way back to Bucharest, and then converged on the capital. The King of Romania and his court fled the country just before it fell.
Just before surrendering, however, Romania’s Prime Minister Ion Brătianu made a bold decision to seal up the country’s gold reserves. He ordered more than 90 tonnes of gold to be loaded in over 1,700 crates onto seventeen railcars, and had it shipped to the one ally Romania was certain it could trust: Russia.
The arrangement made sense on paper. Tsar Nicholas II was Romania’s wartime partner, and an overland route to ship the national gold reserves to Moscow seemed far safer than risking German submarines on the sea route to London.
Fortunately the crates arrived safely; Russian officials locked the gold securely inside the Kremlin and provided a written guarantee that the gold remained Romanian property.
But the Russian Revolution broke out only months later. The Bolsheviks seized power, arrested the Tsar, and eventually murdered him and his family. In January 1918, Leon Trotsky severed ties with Romania and declared its gold “untouchable for the Romanian oligarchy.”
It’s been more than a century, and Romania is still asking for its gold back from Russia. The gold is worth about $12 billion today and has never been returned.
For most of human history, a king kept his gold where he could see it. It sat behind his own walls, in his own keep, guarded by his own men. The idea of loading your treasure onto a ship and sending it to a rival capital for safekeeping would have struck any medieval monarch as total insanity.
The King of France did not store his gold in London. You did not hand a rival your treasury to seize the moment relations soured.
What changed first was London. By the nineteenth century, Britain ruled an empire that spanned the globe. Its navy went unchallenged. And the British pound was redeemable for gold.
The City of London sat at the center of world finance and ran the deepest gold market on earth.
For foreign governments, keeping gold in the Bank of England’s vaults was not a surrender but an upgrade. The metal was safer behind Britain’s guns than behind its own, and given the advances of British finance, the gold could be sold, lent, or borrowed against in an afternoon.
The gravity of financial power shifted to New York a century later as Nazi forces conquered Europe. Allowing your national gold reserves to be confiscated by Hitler became a much greater risk than shipping everything to America.
So country after country scrambled to move their gold before German tanks crossed the border.
America was the safest vault on earth: a nation with an ocean on either side, an economy the war had only strengthened, and a bright future ahead of it.
After the war, the 1944 Bretton Woods agreement pinned the dollar to gold— and pegged every global currency to the US dollar. And from then on New York (and London to a lesser degree) were the obvious places for foreign governments to hold their gold reserves.
A country could settle international debts without moving a single ounce, just by having a clerk slide its bars from one stack to another within the same vault.
The arrangement held for eighty years because the US remained the most powerful, most trusted government in the world. But now that trust is vanishing quickly.
According to a recent report published by the World Gold Council, the number of foreign central banks storing gold in New York or London slipped 17% and 11% respectively. And that’s just in a single year.
And the number of central banks bringing their gold home (or at least moving it to neutral third-party vaults) nearly tripled. Gold, for the most part, is going home.
They’re also buying more of it, with central bank gold purchases running at roughly double the historic rate for the third year in a row.
To fund those purchases, central banks are selling US Treasuries… or letting them mature without reinvesting.
Over the past year, gold passed both US Treasuries and the euro to become the single largest reserve asset on earth. And for the first time since 1996, central banks now hold more gold than US Treasuries.
Central banks almost never sell gold. On the rare occasion that some country does sell, it’s usually because they’re in a genuine crisis (like Turkey selling gold to defend a collapsing currency).
Or, as was the case with the British government in the late 1990s, they’re the dumbest people alive.
Absent that kind of emergency or stupidity, governments and central banks “hodl” their gold.
Bottom line, these countries are not shipping their gold out of London and New York to sell it. Just the opposite. It is proof they intend to hold the metal for a very long time, and that they are willing to give up using it as a financial instrument.
None of this is about the gold price on any given morning.
Over the last few weeks, gold slipped below $4,000 an ounce for the first time since November.
Since last fall, as retail investors entered the market driving the price of gold sharply higher, we warned that a pullback like this was likely.
But we also said that nothing about the thesis was changing. The US was still spending far beyond its means and weaponizing the dollar. Washington was still dysfunctional— full of AOCs and Elizabeth Warrens. Therefore global central banks were continuing to diversify their reserves.
We’re not fanatical about gold. But it’s clear that the long-term catalysts to drive prices higher are not going away anytime soon.
The world is more fractured than it was even a few years ago, and dollar dominance is slipping.
So what does everyone own instead? China is pushing for international use of its yuan… and you can see a flicker of it in the payments data. But it is not a real alternative.
The one asset every central bank on earth can hold without worrying who controls it is gold. Plus they all have confidence that gold will still have strategic value 5, 10, 20+ years from now.
That’s why these central banks view $4,000 gold as a reasonable entry point to accumulate more, and they likely will not miss the chance to do so.
P.S. The same opportunity is open to everyone else. As gold sold off, so did shares in the companies that dig it out of the ground. Even at gold’s all-time highs, many of these producers traded at low multiples while selling their gold for far more than their projections ever assumed.
Their costs stayed roughly fixed, so margins exploded, and some have started paying dividends or raised the ones they had. At $4,000 gold they are still enormously profitable, yet fickle investors are dumping them as if the gold story is over.
It is not. Nothing has changed about why central banks buy, and so far they have moved only a small share of their reserves into gold.
If you want to learn more about these gold companies, and other real assets we research in our newsletter, Strategic Assets, click here.
