The experts tell us that gold is a relic and has no intrinsic value whatsoever. But there’s at least on group of bankers out there that may be changing their tune – the world’s central bankers.
It’s clear that some banks have been stocking up on gold – namely the Chinese, Russians and Indians – over the course of the last couple of years. As the IMF has sold of tons of gold to fund stimulus and bailout programs with fiat paper, emerging economies are hedging their reserve holdings with physical assets like gold, as well as the purchase of international companies in the mining and energy sectors. If and when fiat currencies collapse, hard assets will never go to zero.
And though we have not heard about how the Federal Reserve is managing its gold reserves, which many presume to be almost empty because we haven’t had an audit of the United States’ gold holding in several decades, European Central bankers may be realizing that they better have possession of something other than printing presses and toxic mortgage assets if the SHTF:
Europes central banks have all but halted sales of their gold reserves, ending a run of large disposals each year for more than a decade.
In the CBGA [Central Bank Gold Agreement] year to September, which expired on Sunday, the signatories sold 6.2 tons, down 96 per cent, according to provisional data.
The sales are the lowest since the agreement was signed in 1999 and well below the peak of 497 tons in 2004-05.
The shift away from gold selling comes as European central banks reassess gold amid the financial crisis and Europes sovereign debt crisis.
In the 1990s and 2000s, central banks swapped their non- yielding bullion for sovereign debt, which gives a steady annual return. But now, central banks and investors are seeking the security of gold.
Although many central banks declined to detail their sales plans, the responses of some, along with numerous interviews with bankers and consultants, suggest it is unlikely there will be a return to the trend of the past decade, when CBGA signatories sold on average 388 tons a year.
On its face, the fact that central banks have chosen not to unload gold is a positive sign for the longer-term bull trend which has been in place since 2002 and will likely continue for years to come.
However, as we have seen in the past, when central banks and politicians make a significant financial move, it usually ends up being a contra-indicator. Take, for example, Prime Minister Gordon Brown, who sold approximately 60% of Britain’s gold between 1999 and 2002 when he served as the economic head of the country. Gold, of course, rose some 400% in the following eight years.
While we don’t necessarily believe gold is now going to take a deflationary turn and completely collapse just because central banks are no longer selling, we caution readers that it may not necessarily mean that gold is about to explode in the near term.
Of course, with the economic recession having ended in June 2009, according to the National Bureau of Economic Research, anything can happen going forward. We suspect that the much advertised “double-dip” is now in effect and we will continue to experience problems in housing, employment and economic growth in general. This may lead to another stock market crash at some point in the future and adversely affect precious metals like gold and silver during a selling panic.
In the long-term, however, we feel strongly that the decision by European Central Banks to hold on to their gold is a good one. Unless you are a short-term trader looking for quick profits, we suggest taking the ECB’s recent moves as an insider recommendation to hold on to personal stores of precious metals and precious metals mining stocks. As we’ve opined in the past, gold is has not yet reached dangerous bubble levels and uncertainty with the global economy and global governance will continue to drive the metals higher going forward.
Hat tip Airborne 71