Since 2009 we have seen the signatory central banks of
the Central Bank Gold Agreement cease selling their gold. We have stated many
times in the past that the entire exercise of selling gold by these European
central banks was to support the birth and establishment of the euro. They
felt this was achieved by 2009, 10 years after the launch of the euro.
In the same year we saw the arrival of emerging
nation's central banks into the gold market as buyers. Since then they have
set a pattern of buying gold that continues as a driving force behind the
gold price even today. In this article we look at these events and other
monetary developments in the gold market to see what to expect in the days
and months ahead.
Which Central banks are buying gold and why?
As you have seen in our newsletter in the Table of
central banks buying and selling gold it is the emerging nation's central
banks, whose reserves have been growing strongly that have led the way in
buying gold for their reserves. Their aim is to diversify away from the U.S.
dollar and other leading world currencies and to buy gold as a counter weight
to those currencies.
These central banks are based in Asia, the Middle East,
South America, etc. They include:
Russia - Bangladesh - Philippines - Saudi Arabia -
Thailand - Belarus - Venezuela - India - Sri Lanka - Mauritius - Mexico -
Bolivia - Colombia - South Korea - Turkey - Kazakhstan - Tajikistan - Serbia
- Ukraine - Mongolia - Malta - Greece - Argentina.
The underlying reason why all of them are buying and
why the European signatories to the Central Bank Gold Agreement stopped selling
is because they all consider gold to be an important Reserve Asset and as the
head of the Bundesbank put it, "gold is a
counter to the swings of the dollar". Neatly put, but isn't there more
to this than simply countering the swings of the dollar. Since gold was at
$300 an ounce in 1979 right through to 2005 gold has been at that level or
higher. Now it is at $1,660 five and a half times higher and the dollar is
not five and a half times lower than other currencies. Gold has risen in all
currencies including the euro which was well below €300 to an ounce of
gold and is now at €1,321 more than four times higher than then. It has
risen from $35 an ounce since the sixties a rise of
Clearly, gold adds further ingredients to national
reserves as these numbers demonstrate in part. The emerging world is as aware
of gold's value in their reserves as are the developed world's central banks
and are doing something about it before there are potentially devastating
developments in the global monetary system.
Why do the central banks of the U.S., Germany, France and Italy hold 70%+ of
their reserves in gold?
Having stated that they were sellers of gold from 1999
onwards through until now, Europe's signatory central banks to the CBGA gave
the impression before 1999 that their gold holding weighed heavily above the
gold market. This combined with accelerated mining of gold then as the price
was dropping, forced the gold price down and pushed the developed world to
more and more dependence of the dollar then the euro. But in reality central
banks were not trying to get rid of their gold holdings. Some aimed at
selling 20% of their reserves in total, while others like Germany, did not
sell any of their gold, despite being signatories to the agreement. Some like
the U.K. and Switzerland appeared to gullibly sell half of their reserves.
Then in 2009 all the signatories stopped selling except
for small amounts for the minting of gold coins. This left the holding of
European banks at these levels: -
For such an archaic reserve asset, it is doing very
well in terms of its price moves. But the governments of the developed world knew
that if their 40-year long experiment with un-backed paper money were to go
wrong then gold could come to their rescue and, my goodness, it has!
The now incumbent money managers may well feel
surprised at the way we have described currencies [as an experiment?], but
since Nixon cut the link of gold to currencies back in 1971 that's what we've
had. Now, the money experts and leaders of the world, looking at the way
governments across the developed world have abused this paper money and
particularly national debt levels, they too can see the sinking level of
confidence in such money both inside and outside the developed world. What
can pull them from the brink of disaster if confidence in the two leading
developed world currencies [and leading reserve currencies] collapses? What
can pull the world's leading commercial banks, particularly those fused at
the hip to government [in their asset portfolios], from collapse?
Having watched the credit crunch morph into the
Eurozone debt crisis and potentially return across the Atlantic by year's end
to see the U.S. once again fighting over-indebtedness, developed world
central and commercial banks realize that whatever their dislike of the
discipline of gold and its unmanageability, it will allow them to harness a
confidence that currencies are failing to do. Gold is also facilitating loans
and liquidity that goes far beyond its price.
The structural benefits of gold are now showing clearly
in gold and the need to side-line it from the monetary system is now proving
a dangerous handicap for the monetary system. Hence Basel III discussion
taking place now, to be implemented from January 1st 2013.
In the second part of this article we’ll look at:
- Basel III and its implications for gold and its
- How gold is returning to the monetary system right
now in the banking system.
- Will the 'powers-that-be' continue to allow gold
to be privately owned [including in gold ETFs?
- How can you protect yourself against confiscation
of gold, even if held in Switzerland or elsewhere?