Gold, Bitcoin and FX Reserves.

How a country like Mexico might someday exceed China as the country with the strongest balance sheet.

Countries, like companies, hold assets on their balance sheet. These are primarily Gold and treasury bills of other countries (FX reserves). No country that I am aware of (yet) holds Bitcoin. This is likely to change as El Salvador makes Bitcoin legal tender in September. In this article I argue that over a 20 year year period, choosing Bitcoin as a core asset could move a country such as Mexico (or Germany, France, Poland etc..) to the top spot.

Gold

Gold reserves by country

It’s also worth noting that the major protagonists of WW2: Germany, Italy France and the UK also own massive amounts of gold. The scars of the conflict are still fresh on the central banks of these countries.

FX Reserves

The main owner here is China which owns 3 trillion dollars of US treasury bills, followed by Japan, Switzerland India and Russia.

Again, I would like to point out that although the 3 Trillion dollars for China is a huge number, the Fed reserve balance sheet added more than that over the last 12 months with the COVID pandemic. So these “saving” countries are effectively holding an asset that is being massively inflated (in terms of supply) by the US Federal Reserve.

Putting the Two Together

An astounding 77% of the US reserves are in Gold, but only 3% of China’s are. In the developing world, the percentages are also low. Mexico does not own massive amounts of Gold, although the sum of its dollars and gold is almost a third of ours,.

How Bitcoin could change things

The move by El Salvador to standardize on Bitcoin could be the beginning of this. If Bitcoin is legal tender, then there is less need to hold massive dollar reserves. Holding Bitcoin actually starts to make sense. For the European major countries, France, Germany, Italy and the UK at least some diversification into Bitcoin makes sense. I don’t think they will budge for a while, but in 5 years I could see them start to nibble, and by the end of the 2020’s they could have substantial Bitcoin holdings.

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