Changes in attitude to Gold

cyberr1981 SG

During the year to date, Europe's Central Bankers have been reviewing the importance of gold in their reserves. Undoubtedly there has been a change in their attitude to Gold markets recently. With the risk now attendant in holding U.S. $ as the main reserve asset, the qualities of gold as a solid monetary instrument have become increasingly clear. As there is no possibility of the $'s role being reduced in the monetary system for many years, the position of gold has been reinforced as a present effective alternative to currencies in general.

Comments from Central Bankers in general have demonstrated that the sale of gold from reserves is not proving a wise policy. With the trading partners of the U.S. [most of the developed and some of the underdeveloped world] concerned with the maintenance of their competitive position, the effectiveness of holding currencies other than the U.S. $ as an alternative are disappearing. Gold is therefore singularly effective as a counter to the swings in the $, so warrants an important role as a reserve asset. With the demand for gold set to continue at high levels as an investment, the previously held arguments against gold [that it yields no income] look weak, particularly when one understands the role of reserves. They are there to retain value in all seasons, particularly bad ones. Holding all reserves in income earning assets that does not provide that value in times of distress, is clearly not prudent. It is with this in mind that Central Bankers have been discussing gold in their reserves.

cyberr1981 SG

7 August 2009

Europe's central banks jointly announced a new sales agreement to govern the gold they annually dump onto the market. They announced a 20% lower quota - down to 400 tons per year - despite the price of gold sitting only a couple of rallies away from a new, nominal record.

The fact that these central banks are significantly reducing their gold sales despite the high price of gold can only be interpreted two ways. First, it could simply signify that these central banks have much less gold to sell, and thus will be steadily reducing their sales no matter how high the price of gold goes.
The alternative interpretation would be that despite the near-record price, Europe's central banks expect the price of gold to go much higher - and thus don't want to give away their gold (as was done by U.K. Prime Minister Gordon Browne).

In fact, both interpretations are correct. Even if we take the reported gold reserves of these central banks seriously (despite very good reasons to doubt those claims) Europe's central banks hold little more than 10,000 tons of gold, with about 40% of that amount held by Germany, alone. At the previous ceiling of 500 tons per year (or 5% of Europe's total gold holdings) Europe's central banks would have squandered all their gold reserves in 20 years.

With demand for gold continuing to rise, and an important supply-source being reduced it becomes harder each day for the anti-gold cabal to hold the price of gold below its current equilibrium value. Thus the failure of gold-manipulation - and the resultant explosion in the price of gold will be an important signal that collapse of the global monetary system is imminent.

However, with Germany adamant that it won't sell any of its gold, in reality the previous agreement would have exhausted all of Europe's available gold - forever - in only about ten years. Even reducing this quota to 400 tons per year only extends the 'life' of this game for a couple more years.

The entire world is now operating with a "fiat currency" system for the first time in human history. Every time that individual countries have experimented in fiat currencies, the results have been identical. Bankers print too much money, and much too much debt, and these economic "houses of cards" financially implode in spectacular fashion.
Regardless of U.S. pressure, one by one, Europe's central banks will simply refuse to dump any more of their own gold (following Germany's example). Indeed, Switzerland (who is one of Europe's largest gold-holders behind Germany) announced today it has no plans to sell any more of its gold.