Kevin DeMeritt of Lear Capital Explains Why Russia Sold U.S. Treasury Reserves and Replaced Them With Gold
Increasingly, a number of countries are opting to invest in gold, instead of U.S. Treasury securities, says Kevin DeMeritt of Los Angeles-based gold and precious metals firm Lear Capital.
Decades ago, the U.S. dollar was redeemable for gold or silver. Today, however, like many other nations, the U.S. operates on a monetary standard that’s based on paper redemption, with the Federal Reserve Banks holding notes that are tied to collateral such as U.S. Treasury, federal agency and government-sponsored enterprise securities.
“If you go back prior to 1974 in the United States, we had to back a printed paper dollar with gold,” DeMeritt says. “We don’t do that anymore.”
Treasury securities, according to the nonpartisan Peter G. Peterson Foundation, are often viewed as safe investments due to the assurance the U.S. government will make good on the associated financial terms — which has helped draw interest from more governments and private investors from outside of the U.S. over the years.
Recently, however, their popularity has shifted somewhat. China, for instance — which has traditionally been one of the largest foreign holders of U.S. Treasury securities — decreased the amount of its U.S. debt-based holdings to below $1 trillion for the first time in more than 10 years in 2022.
“They’ve sold off U.S. Treasurys,” Kevin DeMeritt says. “They’ve been replacing it with gold.”
Reportedly, China currently has one of the most significant reserves of gold in the world.
Precious Metals’ Inherent Value
While the federal government will honor the allotted amount that’s stated on U.S. bills, factors such as inflation can reduce their overall value. On the other hand, gold, which has a limited availability, can be better situated to retain worth, DeMeritt says — including during periods of high inflation.
“The value of gold in the early 1900s was $20 [an ounce],” the Lear Capital chairman says. “If you had a $20 paper bill at that particular time, it’s worth 97% less — yet that $20 in gold is worth $1,800 today.”
Yet when inflation hit its 15% record high point in 1980, gold and silver prices also reached new levels, according to Lear Capital’s “The Double Play Opportunity” guide — rising to $850 and $49.50, respectively.
“We can only mine so much gold per year,” Kevin DeMeritt says. Now that we can print up as much money as the central bank wants, every dollar you print, the paper money that’s already out there becomes worth less and less. So paper money is probably going to continue to fall, [as] it has for every nation for hundreds of years now, and the price of gold is probably going to continue to increase as more people and countries take those paper dollars and buy gold.”
In 2020, during the recent COVID-19 pandemic, USA Today reported that the Federal Reserve was printing money “at an unprecedented rate.” DeMeritt places the total amount the government has created in the past 14 years at $22 trillion, which he says has contributed to today’s ongoing high inflation.
“It’s a tremendous amount of money,” the Lear Capital founder says. “To say that inflation is transitory when you’ve printed up $22 trillion — makes no sense.”
Like China, other countries have also increasingly favored investments in precious metals like gold and silver in recent years.
Russia — a robust gold purchaser that Nasdaq reports has increased its reserves by more than 1,900 tons since 2005 — has unloaded numerous U.S. Treasury-related holdings in the past year. From March to April 2022, the country’s holdings declined by 84%, a reduction of more than $81 billion.
“Russia has completely eliminated all of their reserves of U.S. Treasurys, and what did they replace it with?” Kevin DeMeritt says. “Gold. They’ve doubled the amount of gold that they’ve held in reserve at their central bank. Because we’re printing up all this money, they believe holding a Treasury [security] that pays 3%, when inflation is 7%, just makes absolutely no sense. They’re paying us 5% to hold our debt. No one wants to do that for long.”
A New Monetary Landscape
Numerous countries regularly hold and use U.S. currency; the Federal Reserve Board of Governors estimates $950 billion in U.S. banknotes were being held abroad by the end of 2021’s first quarter.
Still, Kevin DeMeritt says, consumers should be aware that some governments are trying to back away from U.S. dollar use.
“These countries are giving themselves the ability to make transactions without using the U.S. dollar, and then selling off U.S. Treasurys and replacing that with gold so they have more and more flexibility over and above using U.S. dollar, which is the world’s reserve currency,” he says. “If we lost [the world’s reserve] status, people in the United States would have a gigantic wake-up call. Things would become much more volatile — with oil prices and everything else — because it [would be] denominated in somebody else’s currency that goes up and down [more].”
As a result, U.S. consumers, much like countries that have increasingly focused on gold, may want to consider a precious metal-based investment approach — such as a self-directed individual retirement account involving the ownership of gold, silver, or platinum bars or coins.
“The central banks have been stockpiling gold over the past four or five years because we’ve printed up so much money,” Kevin DeMeritt says. “There’s a distrust that we’ll [be] able to service the debt here in the United States. When you’ve printed $22 trillion since 2008, it’s a cause for concern. You need to look for an asset that’s going to give you stability and offset the volatility from some of the other investment areas.”
Seemingly more resistant to both market fluctuations and inflation, physical precious metal assets may be able to offer sustained value over time — and potentially help provide enhanced portfolio protection against economic and other challenges.
“Gold has an inverse relationship to stocks and other types of assets,” Kevin DeMeritt says. “In times of war or terrorism, usually you’re going to find the markets become extremely volatile. On a day-to-day basis, nobody knows what’s going on. Gold typically is not going to give you the same volatility, it typically is going to give you more stability.”
