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Is gold the new dollar?

posted on November 4, 2009 at 9:21 am
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News on November 3 that the Reserve Bank of India, the country’s central bank, had purchased 200 metric tons of gold between October 19 and 30 from the International Monetary Fund sent gold soaring to a new all-time high. The yellow metal closed at $1090 an ounce.

And it set loose speculation that could easily push gold to $1300 an ounce on the current trend.

What’s set tongues wagging?

The idea that the buy by the Reserve Bank of India could be a signal that the world’s central banks are buying serious amounts of gold to hedge against a further decline in the U.S. dollar.

If India’s buying, the thinking goes, can China be far behind?

China has been quietly buying gold for years, doubling its holdings over the last six years. But the country still holds only 2% of its reserves in gold. That’s short of India’s 6.2% of reserves in gold after this buy. But both figures are far short of the 60% average in Europe or the 77% of reserves that the U.S. holds in gold. The global average for the percentage of reserves held in gold peaked at 32.7% in 1989. In 2008, after 20 years of selling by the world’s central banks, the global average was down to just 10.3%

There’s enough logic to this theory to make it a powerful force in pushing up the price of gold. The U.S. dollar does, indeed, seem to be in a long-term decline. Many of the countries with large currency reserves such as China are heavily over-weighted toward the dollar and are known to be looking for alternatives. The currency alternatives to the dollar have their own problems ranging from low trading volumes to fiscal deficits at home.

Gold, in contrast, looks like a stable store of value for the long term.

Which may explain why it is rising not only against the U.S. dollar but against all of the world’s major trading currencies. Since the beginning of September gold has outperformed even such “strong” currencies as the euro and the Australian dollar.

I don’t see the rally in gold ending soon. If you ran one of the world central banks, could you think of a good reason to put your faith in th U.S. dollar?

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  • YX on 4 November 2009

    China is the world’s biggest gold producer, if I remember correctly. It was reported that China had been “quietly” buying up gold from its domestic producers while India has to go outside, thus rockets the gold price. This is just one more “small” advantage that China has over India in addition to “rare earth” metals.

  • marcoiks on 4 November 2009

    Where did you read that China was buying gold from its domestic producers? do you have any sources?

  • marcoiks on 4 November 2009


    Does this mean we are late to the party and should avoid buying gold producers like KGC if we haven’t already done so?

  • Jim Jubak on 4 November 2009

    China’s central bank has been a net buyer of gold for the last five years. (I don’t have any information about where they are buying.) China does indeed produce more gold now than South Africa, the former #1 producer, but it’s not clear how long that ranking is sustainable since many of China’s mines tap relatively small deposits and don’t have a long life-expectancy. Not sure why buying domestically confers an advantage. Buying domestically puts more money into circulation inside China and the central bank has been fighting that kind of liqudity expansion off (now) and on (most of the time) over the last five years.

  • Jim Jubak on 4 November 2009

    marcoiks, I think the India buy is a game changer rather than a sign that we’re late to the game. The world used to keep a huge amount of its reserves in gold–global average was 33% in 1989–but only a relative pittance today at 10.3% in 2008. The world’s central banks have been net sellers of gold for the last 20 years. If they’ve now reversed that trend, it’s a huge plus for gold. I’ll have more on this later today.

  • YX on 4 November 2009

    Jim: I meant to say that having all the strategic minerals are an “advantage”.

  • YX on 4 November 2009

    Sorry, it’s “is”, not “are” in my last posting.

    Additionally, Chinese gold producers will end up with the money regardless to whom they sell. If the Chinese central bank does not buy it due to excess domestic liquidity concern (as Jim pointed out), Chinese gold producers have to sell it to someone else which means they still end up with the money regardless who is the buyer(s). Therefore, I believe it’s not only an “advantage” but also a convenience for both parties.

  • YX on 4 November 2009

    To marcoiks and all those who wants to know about China’s buying of gold from its domestic producers, just google it. http://www.financialpost.com/news-sectors/story.html?id=1530063

  • edelay on 4 November 2009

    So again for us who aren’t knowlegable in gold trading where should we go?

  • Jim Jubak on 6 November 2009

    edelay, you could look at my buy of Goldcorp and the comments on that post.

  • M0nst4rB0y on 11 November 2009

    The gold party is not over until the WSJ runs an article on the front page acknowledging the ascent of gold to the new world standard. When that happens sell.

  • pdxappraiser on 18 November 2009

    Jim, if gold is intended as a hedge against the secular decline in the US dollar, that is, if you believe in that thesis, what do you think about holding cash positions in alternative currencies? What currency do you believe would be the best bet?

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