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Are Central Bank Digital Currencies the Future of Money?

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Today we had the pleasure of participating in the (virtual) ringing of the NYSE closing bell to celebrate the six-year anniversary of the launch of our airlines ETF. It’s been an incredible journey, and we extend our gratitude to everyone who helped make it possible. Wheels up! In case you missed it, you can watch the replay of the bell ringing by visiting nyse.com/bell! Central Banks Have Been Net Sellers of Gold So Far this Year Some major changes could be coming soon to a central bank near you, with an estimated 90% of them at some stage of developing a central bank digital currency, or CBDC. In October 2020, the Bahamas became the first economy to introduce its own CBDC, the Sand Dollar, but many more national currencies are expected to be rolled out in the coming years. I have much

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Are Central Bank Digital Currencies the Future of Money?

Today we had the pleasure of participating in the (virtual) ringing of the NYSE closing bell to celebrate the six-year anniversary of the launch of our airlines ETF. It’s been an incredible journey, and we extend our gratitude to everyone who helped make it possible. Wheels up!

In case you missed it, you can watch the replay of the bell ringing by visiting nyse.com/bell!

Are Central Bank Digital Currencies the Future of Money?

Central Banks Have Been Net Sellers of Gold So Far this Year

Some major changes could be coming soon to a central bank near you, with an estimated 90% of them at some stage of developing a central bank digital currency, or CBDC. In October 2020, the Bahamas became the first economy to introduce its own CBDC, the Sand Dollar, but many more national currencies are expected to be rolled out in the coming years.

I have much more to say on this, but first, let’s get an update on official gold purchases. Since 2010, central banks have been net buyers of the yellow metal as they seek to mitigate risk and hedge against their very own monetary decisions.

That being so, 2021 is off to a rough start in terms of official purchases. Central banks were net sellers in January and February for the first time in over a decade, unloading some 16.7 metric tons, according to the World Gold Council (WGC). This has contributed to gold’s poor performance so far this year, falling 6.5% through today. Turkey was the biggest seller, dumping 11.7 tons in February alone. 

Are Central Bank Digital Currencies the Future of Money?

Not all central banks were sellers. India bought 11.2 tons in February, Uzbekistan 7.2 tons. Serbia has been accumulating gold every month since February 2019.

The Magyar Nemzeti Bank (MNB), the central bank of Hungary, announced earlier this month that it tripled its holdings from 31.5 metric tons to 94.5 tons, putting Hungary first among Central and Eastern European (CEE) countries in terms of gold reserves per capita.

“As it carries no credit or counterparty risks, gold facilitates reinforming trust in a country in all economic environments, which still renders it one of the most crucial reserve assets worldwide,” the bank wrote in a press release.

China to Allow Large Gold Imports

When it comes to gold policy, though, the big news is that China is now allowing domestic and international banks to import large amounts of the precious metal into the country in an effort to support prices. According to reporting by Reuters, an estimated 150 metric tons worth $8.5 billion will be shipped into China as soon as this month or next.

For the sake of comparison, in 2019 China imported around 75 tons per month, or $3.5 billion.

The country is already the world’s largest importer of the metal, so this is an important development that I believe could help the gold price stay buoyant.

Old Meets New: Will Cash Take the Digital Dive?

Besides holding gold—one of the oldest known assets, having been mined for over 5,000 years—many central banks are now on a path to introduce their own digital currencies, something our ancestors could never have conceived.

More than 60 central banks right now are believed to be exploring the idea of CBDCs, including retail tokens that would be used by citizens as well as wholesale applications for financial institutions. But first, what is a CBDC, and what isn’t it?

Are Central Bank Digital Currencies the Future of Money?

Simply put, CBDCs are digital payment instruments that, like traditional fiat currency, are issued by a central bank and denominated in the national unit of account. The hope is that they will allow for safe and secure transactions and provide a transparent audit trail while also featuring a level of confidentiality.

Another benefit? No more having to break bills. Many people have shied away from using dirty paper cash during the pandemic, but in years past, Americans would lose some $62 million every year in loose change.

For now, CBDCs appear to be designed not to replace traditional cash but to supplement it. Nor do they seem to threaten the growing popularity of cryptocurrencies such as Bitcoin, whose price is far too volatile to be used as an everyday medium of exchange. Last week, Federal Reserve Bank of Dallas President Robert Kaplan called Bitcoin a “store of value,” like gold, rather than a currency.

Having said that, many merchants now accept Bitcoin as payment, the most notable, perhaps, being Tesla. Visa and PayPal already let customers use cryptos to settle transactions, and this week, PayPal-owned Venmo said it will permit crypto trading. Miami mayor Francis Suarez wants to allow residents to pay their taxes in Bitcoin.

Some central banks are ahead of others in launching a CBDC. Like I said, the Bahamas has the Sand Dollar, while Cambodia has the Bakong. Gold-loving China has reportedly been working on a digital yuan since 2014, and recently it doled out millions of dollars’ worth of the prototype currency to people in Shenzhen and other cities to test drive. Meanwhile, Britain’s Treasury and the Bank of England (BOE) announced this week the creation of a taskforce to look into what some people are calling the “britcoin.”

Are Central Bank Digital Currencies the Future of Money?

No Cash, No Problem

Transitioning to digital currencies is easier when the country already has a history of preferring online payments to paper cash. Take Sweden and Norway, two of the most cashless societies. Both Nordic countries are currently working on their own CBDCs.

As some of you may know, Sweden was the world’s first country, in 1666, to issue paper money. Today, it’s set to become one of the first to introduce a digital token, the e-krona, possibly as early as November 2022. The move follows years of declines in the amount of banknotes and coins circulating in the Swedish economy. Only around 6% of transactions are believed to be made using physical cash.

Are Central Bank Digital Currencies the Future of Money?

In neighboring Norway, that figure is even lower at between 3% and 4%. In a press release published yesterday, the Norges Bank says it plans to “test technical solutions for a central bank digital currency (CBDC) over the next two years.”

Bitcoin Dominance Drops, Opening the Door to Other Cryptos

Again, CBDCs are not expected to compete with cryptos such as Bitcoin, which is taking its place as a tradeable asset like gold.

The world’s largest cryptocurrency is well off its all-time high, dipping below $50,000 today for the first time since early March in response to news that President Joe Biden is expected to propose a hike in the capital gains tax to as high as 43.4%. Investors clearly had some feelings about this proposal: Stocks fell close to 1% on Thursday.

Are Central Bank Digital Currencies the Future of Money?

In any case, Bitcoin’s weakness could very well be other cryptos’ boon. For the first time in three years, its market cap as a percent of the total cryptocurrency ecosystem dropped to 50% this week as its price slid. When this has happened in the past, according to Cointelegraph, other coins have moved in to pick up the slack, with gains led by Ether. Indeed, Ether hit a new all-time high of $2,583 yesterday as analysts predict further advances on a scheduled drop in supply.

Gold Market

This week spot gold closed the week at $1,777.20, up $0.69 per ounce, or 0.04%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 2.14%. The S&P/TSX Venture Index came in off 1.65%. The U.S. Trade-Weighted Dollar fell 0.79%.

Date Event Survey Actual Prior
Apr-22 ECB Main Refinancing Rate 0.000% 0.000% 0.000%
Apr-22 Initial Jobless Claims 610k 547k 586k
Apr-23 New Homes Sales 885k 1021k 846k
Apr-26 Durable Goods Orders 2.5% -1.2%
Apr-27 Hong Kontg Exports YoY 15.0% 30.4%
Apr-27 Conf. Board Consumer Confidence 112.0 109.7
Apr-28 FOMC Rate Decision (Upper Bound) 0.25% 0.25%
Apr-29 Germany CPI YoY 1.9% 1.7%
Apr-29 Initial Jobless Claims 550k 547k
Apr-29 GDP Annualized QoQ 6.5% 4.3%
Apr-30 Eurozone CPI Core YoY 0.8% 0.9%

Strengths

  • The best performing precious metal for the week was palladium, up 3.01%. Gold rose above its 50-day moving average on Monday as the 10-year Treasury yield and U.S. dollar trended lower. Bullion hit a seven-week high of $1,785 an ounce.
  • Palladium rose as much as 4.8% on Wednesday to $2,895.96 an ounce – a new record high. The metal is up more than 17% so far this year. Palladium is used in catalytic converters to cut emissions in gas vehicles and the market has been in a production deficit for several years.
  • De Grey Mining shares finished Friday’s trading session up 20.22% on reporting strong mineralization with visible gold in the core from the McLeod lode of the Crow zones within the Hemi Gold Discovery in Western Australia.

Weaknesses

  • The worst performing precious metal for the week was gold, still up slightly by just 0.04%. Interesting to note that in recent weeks every precious metal has finished with positive week over week gains. Gold fell the most in a week on Thursday morning after better-than-expected U.S. jobs data. Initial jobless claims decreased to 547,000 in the week ended April 17, according to the Labor Department, marking a new pandemic low.
  • PT Archi Indonesia has postponed its planned IPO of as much as $500 million due to weak gold prices and falling stocks, reports Bloomberg. The gold miner is a unit of conglomerate Rajawali Group and would have been the biggest Indonesian IPO since 2011. Gold is down 14% from its record high in August and the Jakarta Stock Exchange Composite Index is down 7% from a three-year high in January.
  • Central bank gold purchases are off to the worst start to the year since 2009. According to the World Gold Council, net changes in central bank reserve holdings for January and February were negative 16.7 metric tons. This is compared to 65.1 tons for the same period a year earlier.

Opportunities

  • India’s gold imports from Switzerland rose to the highest in nearly eight years last month, a strong sign that Asian consumer demand has returned. India, the world’s number two consumer, imported 82.6 tons from Switzerland in March. “These latest numbers certainly demonstrate the degree of pent-up demand in the country after the implosion in 2020,” Rhona O’Connell, an analyst at StoneX, wrote in a note. China’s gold imports also surged in March to 38,584 kilograms, according to data from General Administration of Customs. The figure is the highest since January 2020 and up from just 6,272 kilograms in February.
  • Sandvik, a mining equipment, machine tooling and materials technology company, said order intake rose organically in the first quarter by 12% to $2.97 billion. CEO Stefan Widing said demand was driven by strong momentum in mining and continued improvement in short-cycle business. Kitco News notes mining accounts for 40% of the company’s revenues.
  • Palladium approached all-time highs again this past week. Auto demand is picking up with lockdowns being relaxed across the U.S, but palladium is facing its 10th successive year of supply falling short of demand, thus the positive market dynamics that could keep palladium in the spotlight longer than anticipated. In addition, there are only a limited number of miners with exposure to PGM deposits.

Are Central Bank Digital Currencies the Future of Money?

Threats

  • Newcrest Mining CEO Sandeep Biswas said in a media briefing this week that although there is likely to be further consolidation in the gold industry, current valuations make it a tough market to find compelling targets. “At the moment, with valuations where they are, it’s going to be very hard to get the sort of returns you’re after,” Biswas said. “You’d be talking single-digit IRRs (investment rates of return), whereas typically we look at double-digit IRRs as a target for ourselves.”
  • Canadian miner Alamos Gold is pursuing a $1 billion claim against Turkey for preventing a mining project from moving forward, according to a company press release. The company will file an investment treaty claim against the country for “expropriation and unfair and inequitable treatment” concerning its Kirazli gold mine. The Turkish government did not renew mining licenses for the project in October 2019 and a year later cancelled a forestry permit. Alamos has operated for a decade in Turkey and expects to take a $215 million impairment charge in the second quarter.
  • China, one of the main drivers of copper prices could fade. The government is reducing its construction stimulus, which is generally negative for materials. There appears to be an absence of government buying right now. Output from South American mines is increasing as vaccines are rolled out.

 

Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average lost 0.46%. The S&P 500 Stock Index fell 0.13%, while the Nasdaq Composite fell 0.25%. The Russell 2000 small capitalization index gained 0.55% this week.
  • The Hang Seng Composite gained 1.04% this week; while Taiwan was up 0.82% and the KOSPI fell 0.39%.
  • The 10-year Treasury bond yield fell 2 basis points to 1.555%.

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Solana, rising 34.16%.
  • The U.S. House of Representatives passed the Eliminate Barriers to Innovation Act of 2021, which seeks to set up a digital asset working group with representatives from the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). The purpose of the group, as per the legislation, is to ensure collaboration between regulators and the private sector, to foster innovation. The goal of the legislation is to seek clarification when the SEC has jurisdiction over digital assets, in the case when they are deemed securities and when the CFTC has jurisdiction, when the digital assets are classified as commodities.
  • Grayscale Investments, the world’s largest digital asset manager, reported that it acquired approximately $1 billion in cryptocurrencies in a 24-hour period. Grayscale’s assets under management rose from $44.9 billion to $45.8 billion this week, including increases of $283.3 million and $586.5 million to its Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETHE), respectively. Meanwhile, Ethereum’s native cryptocurrency ether (ETH) rallied to new all-time highs this week, reaching a record $2,644.04 per token.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Curve DAO Token, down 38.58%.
  • Turkish crypto exchange Thodex has come under scrutiny this week as the exchange halted all transactions, stating on its website that it is evaluating an unspecified partnership offer and that the process would take about 4-5 business days. Thodex, before shutting down, had a trading volume of $585 million in cryptocurrencies. Although the exchange’s website says that there is no cause for concern and that the negative news on the internet is not true, Thodex’s executives are deactivating their social media profiles and the platform’s customer support group is unresponsive.
  • Bitcoin, which is currently trading below $50,000, showed technical signals of slowing down after it dropped below its 50-day moving average for the first time this year. By the end of this week, it had also slipped below its 100-day moving average. This week’s decline of almost 20% was kicked off last Saturday with $10 billion in long future liquidations and a reduction in the network’s hashrate capacity, which also sent Bitcoin transaction fees to 2018 highs. This short-term bearish sentiment was reflected in Scott Minerd’s, Guggenheim’s CIO, latest interview where he mentioned that the cryptocurrency could fall back to the $20,000 to $30,000 range due to current frothy market conditions, but still remains bullish in the long-term.

Are Central Bank Digital Currencies the Future of Money?

Opportunities

  • Huobi Technology Holdings, which is a part of Huobi Group, announced that it has launched four digital currency funds targeting $100 million in assets under management by September 2021. The company reported that it has already secured $50 million in commitments across all its proposed funds. Huobi’s funds include a private equity fund that invests in private crypto mining companies, an active fund that invests in a basket of digital assets, and two funds that will invest directly in Bitcoin and Ethereum.
  • 3iQ Corp., the Canadian digital asset manager, and investment firm CoinShares launched an ether exchange-traded fund (ETF), which started trading on the Toronto Stock Exchange (TSX) this week. The ETF, called the 3iQ CoinShares Ether ETF, is trading under the ticker ETHQ and will give investors exposure to the daily price movements of ether, Ethereum’s native token, and the opportunity for long-term capital appreciation.
  • 21Shares AG, the Switzerland-based investment products provider, announced that it is launching exchange-traded products (ETPs) for the native cryptocurrencies of Stellar and Cardano. The company reported that the Stellar XLM ETP and the Cardano ADA ETP will start trading on the Swiss SIX Exchange on April 26, under the tickers AXLM and AADA respectively. 21Shares said that it is responding to surging customer interest in Stellar and Cardano and has decided to remove Bitcoin Cash and Ripple ETPs from its 21Shares HODL basket ETP.

Threats

  • European and British regulators are studying cryptocurrency exchange Binance’s digital stock tokens over its possible non-compliance with securities laws. The zero-commission tokens allow its users to buy fractions of companies’ shares – currently Tesla and Coinbase—and qualifies token holders for returns including dividends. Binance reported that such transactions can only be settled by Binance USD (BUSD), a U.S. dollar stablecoin issued by the exchange. Regulators are arguing that the tokens may not provide sufficiently transparent corporate disclosures, specifically an investment prospectus, and that would be required if the tokens were judged to be securities. Binance claims that the tokens are an official CM-Equity AG product, which is compliant with the European Union’s market rules and banking regulations. Experts are also concerned about the ambiguity over whether Binance itself presents the tokens as securities or derivatives.
  • Three of the largest Chinese Bitcoin mining hubs—Xinjiang, Inner Mongolia, and Sichuan—are facing regulatory clampdown which could put a big dent in the global hashrate production, which is the computing power to mine bitcoin. China contributes over 65% of the world’s total hashrate, and heavy scrutiny of coal mines in Xinjiang, new regulations on high energy-consuming companies in Inner Mongolia and the end of a local energy policy in Sichuan have unnerved bitcoin miners in the country. An accident at a coal mine in Xinjiang left 21 miners trapped and prompted the region’s government to suspend operations and conduct an inspection of other coal mines in the region. This suspension plunged bitcoin mining power by 30% and pushed bitcoin transaction fees to a record high. Furthermore, China’s highest economic planning agency, the National Development and Reform Commission (NDRC) has decided to shut down and eliminate all crypto mining operations in Inner Mongolia by the end of April.
  • Nassim Taleb, a former risk analyst and author, believes that Bitcoin is not a hedge against inflation as there is no connection between the pair. In an interview, he mentioned that you can have hyperinflation and Bitcoin going to zero, and that earlier this year that he sold off his Bitcoin holding due to its volatility, explaining that his stance was based on Bitcoin as a currency and not as a store of value.  

Continue reading at https://www.usfunds.com/investor-library/investor-alert/are-central-bank-digital-currencies-the-future-of-money/

April 23, 2021

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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