Central banks heading for safe heavens
Gold buying by the global central banks will hit a new high this year of more than 500 tons up from 465 tons in 2011, according to data compiled by the World Gold Council. Only yesterday the Bank of Korea announced that its gold reserves rose by 14 metric tons, a 20 per cent jump in total holdings to 84 tons.
Central bank gold buying has become a pillar of the gold market today. Only a few years ago the central banks were net sellers of gold under a long-standing inter-bank agreement. But lately they have been among the biggest buyers to protect against weaker currencies and the potential for faster inflation.
In truth this is a gradual return to a de facto gold standard with gold assuming a bigger and bigger role in the currency system again. That is after all the main function of the central banks, and to preserve the value of money in troubled markets they are turning back to gold.
It is more than a little ironic that the central banks themselves are arguably the biggest cause of this instability. If they were not printing money like a house on fire then the danger of devaluation and inflation would not be present.
Still the banks are great jugglers of finance and do whatever they can to avert the worst side-effects of their own rotten medicine. Individual investors and financial institutions could do a lot worse than follow their example and hoard precious metals as a hedge against currency devaluation and inflation.
This has worked very well for the past five years, with gold prices doubling against little upside to most asset classes in that period. Indeed, gold was only outperformed by silver and a couple of agricultural commodities in that timeframe.
However, throughout the whole of the past decade while gold has been on its upward trajectory there have been many doubters. They are still around today with their outrageous claims that the gold bull market is somehow over and that nobody has really noticed.
Money printing anyone?
Where is the end to the money printing? What about QE3 to infinity or at least until the end of 2015? The European Central Bank’s commitment to buy bonds? The Bank of England’s bigger-than-anybody’s QE program? The Bank of Japan’s legendary money printing? Or the People’s Bank of China’s regular multi-billion dollar injectioins into its own stumbling economy?
And what of the rising output of global gold mines? Can they keep up? Actually they are struggling to maintain production levels with major labour problems in South Africa and very few new discoveries.
So what happens if the global central banks and the investors of the world want to buy more gold next year? The price will go up. Where will the gold come from for the upcoming Chinese exchange traded fund for the world’s most populous nation?
Bloomberg data from yesterday shows global ETF gold holdings at an all-time high of 2,627 tons, equivalent to the fourth-biggest hoard in the world, exceeded by only the US, Germany and the IMF, according to World Gold Council data. How much gold will the Chinese ETF require next year?