At the end of the 20th century, many Western central banks were still net sellers of gold. The Bank of England, under then-Prime Minister Gordon Brown, even managed to sell off Britain’s state gold at its absolute low. In Germany, many were glad at the time that the Bundesbank did not participate in these nonsensical gold sales.
After the dot-com bubble burst and also as a result of the steady rise in gold prices, central bank gold sales initially slowed down in the first ten years of the new century and eventually came to a complete halt. However, it took the financial crisis to drive central banks worldwide back into the camp of gold buyers.
A major pioneer in this development was the People’s Bank of China, as the Chinese central bank had realized during the financial crisis that its large US dollar-based reserves did not offer optimal protection. Since then, the People’s Bank of China has been one of the largest and most consistent gold buyers among central banks, and remains so today.
The Exemplary Role of the People’s Bank of China and other Central Banks
The central banks of many other states followed this example. They also bought gold. Though not as much and not as consistently as the Chinese central bank, they did buy gold. Perhaps it would be better to say at this point: They only bought gold.
Because while many central banks also accumulated significant silver reserves in the 19th century, the ‘little brother’ of gold played no role in central bank reserves in the 20th century. This trend has practically continued to the present day.
So, gold is being bought, while other precious metals like silver, platinum, palladium, or rhodium play no role as reserve metals for central banks. Central banks not only served as a certain role model for each other, but also for private investors and large institutional investors. They too, if they bought anything at all, primarily bought gold.
Are We Witnessing a Paradigm Shift in Silver?
However, news has recently emerged that the Saudi Central Bank has bought silver for the first time. The purchase became public through SEC filings. They show that the Kingdom’s central bank purchased approximately 932,000 shares of the iShares Silver Trust (SLV) worth $30.6 million, as well as 203,700 shares of the Global X Silver Miners ETF (SIL) worth $9.8 million.
The step is absolutely unusual and remarkable. While the total investment sum of $40.6 million is small for a central bank, this purchase could still have a signaling effect. Only 90 tons of physical silver were purchased. The Saudis could just as well have bought about one ton of gold.
That they did not do so is one part of the message. The other part concerns the purchase of mining stocks via the Global X Silver Miners ETF. Here too, it’s not just remarkable that Riyadh decided to buy silver miners. The purchase of stocks is no longer entirely atypical for central banks. In particular, the central banks of Switzerland and Japan have repeatedly bought shares of large technology companies over the last decade.
Buying US tech giants is understandable, but the much, much smaller silver miners? No central bank has yet come up with the idea of buying them. While the Swiss National Bank bought Apple shares after they had already risen quite high, the Saudis are now striking at silver miners, and they are doing so at a time when the valuations and prices of silver miners are still very low.
Will this Example Set a Precedent?
Whether other central banks and later also institutional funds and private investors will follow this example is one of the exciting questions that the future will answer. The chance to achieve high profits with physical silver and silver miners is at least present, and it is very high.
One must certainly credit the Saudis with good market timing. Whether buying an exchange-traded ETF is the optimal means to implement this strategy remains to be seen. At this point, the Saudi central bank’s initiative could still have a certain trial-and-error character.
However, the fact that this path is being taken should be viewed positively. It opens up new possibilities and is at the same time a tacit acknowledgment of the fact that in an ocean of credit money at risk of default, true and lasting values without any counterparty risk are extremely rare.
