Why are central banks buying gold, the opposite of their own creation, paper money?
Money is the opposite of gold and silver. Fiat money is based on ordinance and credibility and is not self-limiting (can be printed infinitely) whilst gold and silver is commodity based and physically limited to the amount of physical gold and silver available and mined, you choose either one or the other. One is purely based on credibility hence why notes need to mention the nominal value in order to give the piece of paper value. American paper money is backed by only the size and strength of the American economy. The other money is based on real value, the value of the gold itself. And especially for that reason investors should be warned considering the fact that more and more central banks are buying gold, the opposite of their own creation: paper money. This is so contrarian. It is like the butcher who doesn’t want to eat his own sausages because he knows what is in it. Why would central banks buy gold, which “limits” their creation of credit? The answer is: the fear of lost credibility of paper money, because of the constant undermining, dilution, debasement of their currencies with quantitative easing measures not sorting the desired effect of sustained economic growth because we have passed the tipping point whereby the overwhelming debt levels (Debt/GDP > 77-90%) have started to depress economic growth.
Central banks have been buying gold since 2008!
In this context it is interesting that the world's central banks have been net buyers of gold since 2008. In 2011, global central banks continued to be net buyers of gold as they attempted to “diversify” from their dollar and euro holdings, rebalance reserves, and protect national wealth. Why, if gold has no monetary function any longer, why buy gold? Why buy the opposite of the US dollar, the anchor of the financial systemden="false" UnhideWhenUsed="false" Name="Medium Grid 2 Accent 6"/> Total world production is around 2,700 tonnes, in other words central banks are purchasing about 20% of the world’s gold production!
A growing number of emerging countries have also increased their purchases of gold in recent years to bolster their rapidly growing currency reserves, as sovereign debt crises have weighed on traditional reserve currencies such as the U.S. dollar and the Euro. Nations from Brazil to Iraq to Russia are buying the precious metal to add to official reserves. National Bank of Ukraine (NBU) said in late December it raised the percentage of gold in its reserves in 2012 to 7.72% from 4.36% a year ago. The bank said it is boosting its gold reserves “to avoid the negative impact of the global crisis on the economic development of the country as it works on diversifying the components of international reserves in Ukraine.” Brazil doubled its gold holdings in two months last year, buying 17.2 metric tons in October and 14.7 metric tons in November. According to data released late last month by the International Monetary Fund, Iraq bought gold during August-September, lifting its official precious metals reserves from 5.8 metric tons to 31.07 metric tons. The worldwide stimulus measures and ultra low interest rates will continue to support investor interest in gold in the absence of low-risk investments that can offer acceptable yields. The conclusion is that the central banks have been a major force behind the increase in the gold price. The gold price rose more than threefold between 2007 and late 2011 -- from around $600/oz to a peak of $1,895/oz. The most important question is why all these banks buy gold, the opposite of their own creation: paper money?
The “objective” of the Washington Agreement was “reversed”.
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I've been reading Lew Rockwell's Mises Institute writers for a few years and read the newsletter daily. I own no gold and all my silver is in a safe in another state, far from here. Frequently, and again today, I tell my wife, "Our net worth is the gold and silver we own. Yeah, that little."
ReplyDeleteLast month I bought two ten-ounce silver bars for $700 while HSBC was buying 876 million dollars worth from Poland. Most of the silver I have bought is worth two to three times what I paid. Shoulda bought more.
Most of the silver I have bought is worth two to three times what I paid. Shoulda bought more.
DeleteSame here, but I just bought 90% silver dimes.
I'm a contrarian to the governments buying and selling. I did most of my buying in 2000-03. Thats when governments worldwide were selling. I have been selling over the last year because governments are buying. Government always buys high and sells low, but make up the difference in volume. The same happened in crude oil. In 1999 the Clinton administration sold the Elk Hills Oil reserve, almost at the bottom of the oil market. You can count on the government being on the wrong side of any trade. The fools are the last to catch on, thats why they count on taxation and seizure to add to their booty, if not outright counterfeiting of the currency.
ReplyDeleteYou can count on the government being on the wrong side of any trade. The fools are the last to catch on, thats why they count on taxation and seizure to add to their booty, if not outright counterfeiting of the currency.
DeleteWell said.
To quote The Fabulous Mogambo(TFM), buy gold,silver and oil. This investing stuff is easy!!!
ReplyDeleteWheee
Junior Mogambo Ranger (JMR)
Terry
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