Central Banks are slowly but surely diversifying away from the US Dollar into Gold.
This is one of the most interesting and potentially disruptive macro trends since the pandemic.
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Foreign Central Banks have been sending a clear message to US policymakers: we intend to diversify away from the US Dollar.
The chart above shows the % of total foreign exchange reserves held in USD (blue), EUR (white) and gold (orange).
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Before you get too excited: please remember the chart uses market values for Gold and other currencies.
The recent, massive appreciation in Gold skewes the % for Gold on the upside - but even after correcting for that, there has been a clear move away from USD into Gold
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A deep understanding of the mechanics behind fiscal and monetary operations will be an important skill to navigate markets.
Here is a quick guide to help you master the topic.
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The table below can be used as a Cheat Sheet to quickly assess what impact a certain monetary/fiscal mix can have on markets and the economy.
Let's go through 2 quick examples:
1️⃣ QE + Fiscal Deficits
- Fiscal deficits inject new money for the private sector; when the government cuts your taxes or sends you a cheque, all of a sudden you have more spendable money!
- The Fed creates new reserves (QE) and absorb bond issuance, leaving banks free of that burden and with more ''liquidity'' (reserves)