Close X Cookies are necessary for the proper functioning of 24hGold.com. By continuing your navigation on our website, you are accepting the use of cookies.
To learn more about cookies ...
EnglishFrench

Central-Bank Gold: Joining the Dots

IMG Auteur
Published : January 29th, 2012
1176 words - Reading time : 2 - 4 minutes
( 2 votes, 5/5 )
Print article
  Article Comments Comment this article Rating All Articles  
0
Send
0
comment
Our Newsletter...

 

 

 

 

Yes, central banks are holding more gold. But they're holding very much more wood-pulp on top...


The gold price on Wednesday broke up through the downtrend starting at last summer's record high. Or so a technical analyst studying the price chart would tell you.


But just as in late 2007 - from where gold began a 55% run inside 6 months - this week the price of gold bullion jumped on news that is fundamental: the price of money, specifically Dollars, the world's #1 currency for trade and central-bank reserves.


Back in 2007, the catalyst came as a baby-step rate cut of 0.25%, signaling the Fed's switch from raising to destroying the returns paid on cash savings. Now the Fed's new zero-rate promise "took gold comfortably clear of the 50, 100 and 200-day moving averages, and opened up some big targets to the upside," says one London technician. The previous ceiling of $1700 has become a support level according to bullion bank Scotia Mocatta, "with further key support at the 200-day moving average at $1645."


Whatever you make of such numbers, it's worth stepping back to see the wood for the trees. Because the trend in who's buying gold, and why, is so plain to spot that you hardly need join the dots.


Gold bullion holdings amongst the world's central banks, for instance, have risen to a 6-year high, according to data compiled by the International Monetary Fund. Emerging and developing nations have swollen their gold reserves 25% by weight since 2008. The debt-heavy West is a net seller, but only just.




"There's a perception perhaps that gold is no longer a crucial part of the financial system in the way that it was under the Gold Standard before 1970, 1971," as Marcus Grubb of the World Gold Council put it in an interview with Tekoa Da Silva this week. "But in fact that's not really true.


"Because even with the ending of the Gold Standard, gold remains as an asset held by the world's central banks...and you've seen a trend recently for gold to become more and more a part of the fabric of the financial system."


A good chunk of this weaving is due to official reserves. But as our chart shows, central banks control a shrinking proportion of what's been mined from the ground. A far greater tonnage of gold again is finding its way into private ownership, and there - as Marcus Grubb notes - it's having a greater still impact on how money and finance work.


First, private individuals have led the rediscovery of gold as a financial asset, rather than the decorative store-of-value it had become by the close of the 20th century. So now, China's giant bank ICBC for instance is holding gold for the "accumulation" savings of 2.3 million citizens, a program developed in partnership with the World Gold Council. Also the WGC partners with BullionVault, amongst several other private-investor providers worldwide. But institutional finance is catching on, and gold is now in front of the Basel Committee on global banking, proposed as a "core asset" for banks to hold - and count as a Tier 1 holding - for their liquidity requirements.


After all, turnover in London's bullion market, center of the world's gold trade, is greater at $240 billion per day than all but the four most heavily traded currency pairs worldwide. So its liquidity is barely equaled. Turkey's regulators already acknowledged physical gold bullion as a Tier 1 asset for its commercial banks starting in November, with the cap of 10% worth some 5.5 billion Lira ($2.9bn) according to Dow Jones. And a growing number of investment exchanges, meantime, as well as prime brokers, now accept gold as collateral, posted as downpayment by institutions against their commodity and other leveraged positions.


Gold bullion pays no interest of course. But in our zero-yielding world, that only puts it ahead of where the capital markets are being herded by central-bank policy anyway. Nor does gold have much industrial use (some 11% of global demand in the 5 years to 2011), a fact which highlights its unique "store of value" attributes. Being physical property, gold is no one else's debt to repay or default. Being globally traded, it's deeply liquid and instantly priced. And being both rare and indestructible, it couldn't be any less like "money" today.




Scarcely a lifetime ago, gold underpinned the globe's entire monetary system. Outside China, which tried sticking with silver, the compromised and then bastardized Gold Standard which followed first World War I and then World War II still saw the value of central-bank gold reserves vastly outweigh the paper obligations which those banks gave to each other.


Even three decades ago, 10 years after the collapse of what passed for a Gold Standard post-war, central-bank gold holdings still totaled some three times central-bank money reserves by value. But look at the decade just gone - the 10 years in which gold investment beat every other store of value hands down. Pretty much every currency you can name lost 85% of its value in gold. Yet the sheer quantity of new money pouring into central-bank vaults saw their gold holdings only just hold their ground.


Gold's rise, in short, has been buried under wood-pulp. To recover its share of central-bank holdings as recently as 1995 would now require a further doubling in value. To get back to the 1980s' average would require a 15-fold increase. Or, alternatively, a 93% drop in the value of foreign currency reserves relative to central-bank bullion holdings.


Such a trend is not yet in train, neither on the charts nor the fundamentals. The US Dollar remains the biggest reserve currency, weighing in at 62% of stated reserves according to IMF data, down from its peak above 71% in 2001 but more than equal to its share in the mid-1990s. Even so, as former FT columnist and current capital-markets editor at The Economist Philip Coggan writes in his latest book, Paper Promises:


"If Britain set the terms of the Gold Standard [1870-1914], and America set the terms of Bretton Woods [1944-1971], then the terms of the next financial system are likely to be set by the world's biggest creditor - China. And that system may look a lot different to the one we have become used to over the last 30 years."


Coggan rightly notes that China isn't the only large creditor, and nor does it hold anything like the dominance which the US held at the end of World War II. But whether this switch starts today or only starts to show 10 years from now, such a change of direction can't be discounted to zero. Repudiation of government debt - the form which most foreign currency reserves take - will only begin with the Greek bond agreement, perhaps leading first to a rise in US Dollar holdings but also highlighting the ultimate risk of paper promises.


That fear, of having to write off money in default or devalued, is already driving the rise in central-bank gold purchases.


 

 



Companies Mentionned : Catalyst | Gold Holdings | Gold | Standard Gold |
Data and Statistics for these countries : Turkey | All
Gold and Silver Prices for these countries : Turkey | All
<< Previous article
Rate : Average note :5 (2 votes)
>> Next article
Adrian Ash is head of research at BullionVault.com, the fastest growing gold bullion service online. Formerly head of editorial at Fleet Street Publications Ltd – the UK's leading publishers of investment advice for private investors – he is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.
WebsiteSubscribe to his services
Latest comment posted for this article
Be the first to comment
Add your comment
Top articles
Latest Comments
First Report since April, 2014
05 FebAndy_K1
Jason, One of your articles written way back is one of the reasons I started paying attention to silver and shortly thereafter started to ...
Something has Changed in Gold St...
06 Febneville
No nothing strange has happened in GOLD stocks....absolutely nothing.....The fact of the matter is that you byrne have been playing the man and...
The Revisionist Theory and Histo...
05 Febovertheedge
"The key is in the hand of the U.S. government. It is the same key that was used to lockthe U.S. Mint to silver in 1873, and to gold sixty years la...
First Report since April, 2014
05 FebS W.1
Here I was just 2 days ago thinking whatever happened to that evangelical silver guy. Low and behold up he springs, like some spirit from the g...
LBMA Silver “Price”: A Perfect S...
03 FebS W.
There is no doubt that the Comex can be used as a casino for those who want to trade Silver up/or down or maybe some just wish to take a small punt...
LBMA Silver “Price”: A Perfect S...
30 JanOzSILV1
Bron refuses to EVER admit this market is a Casino and the disconnect between Paper and Physical is a big clue to this
LBMA Silver “Price”: A Perfect S...
30 JanS W.
Usually I enjoy Bron's take on things,but to be perfectly honest, I can't understand 95% of what he his on about here. I get the feeling that h...
ANOTHER NAIL IN THE U.S. EMPIRE ...
30 JanDemosthenes0
Very naive and pretentious article! The author thinks he knows everything and yet knows next to nothing. Shale gas producers are neither stupid n...
Most commented articlesFavoritesMore...
World PM Newsflow
ALL
GOLD
SILVER
PGM & DIAMONDS
OIL & GAS
OTHER METALS
Mining Company News
Lara Expl.(Cu-Zn-Au)LRA.V
Revised Resource Estimate Report Filed for Maravaia Copper Gold Deposit
CA$ 0.34+1.47%Trend Power :
Corporate news
Black HillsBKH
Black Hills reports 4Q loss
US$ 50.90-0.59%Trend Power :
Corporate news
Kinder Morgan(Oil)KMP
Midstream Companies Were above the 20-Day Moving Averages
US$ 102.03+1.98%Trend Power :
Corporate news
Kinder Morgan(Oil)KMP
Midstream Companies Were above the 20-Day Moving Averages
US$ 102.03+1.98%Trend Power :
Corporate news
Devon Energy(Ngas-Oil)DVN
Gasoline Inventories Rose Last Week despite Fall in Production
US$ 22.66-4.31%Trend Power :
Corporate news
United States Steel(Fe-Sn)X
U.S. Steel (X) States Ratification of Labor Agreements
US$ 7.34-5.53%Trend Power :
Corporate news
Black HillsBKH
4:34 pm Black Hills Corp beats by $0.04, misses on revs; guides FY16 EPS below consensus
US$ 50.90-0.59%Trend Power :
Corporate news
Black HillsBKH
Black Hills Corp. Reports 2015 Fourth Quarter and Full Year Results
US$ 50.90-0.59%Trend Power :
Corporate news
Transcanada PipelinesTRP.TO
TransCanada to Sign Substantial Agreement to Benefit Québec Economy
CA$ 48.65+0.16%Trend Power :
Corporate news
Devon Energy(Ngas-Oil)DVN
4Q15 Crude Oil Prices: Fallout for the Energy Sector and SPY
US$ 22.66-4.31%Trend Power :
Corporate news
Comments closed