Bet you didn’t know that Sunday, September 26, marked the end of the year.
Well, it did for the world’s central banks that participate in the Central Bank Gold Agreement, which lays out quotas for how much gold central banks can sell in a year. The agreement was put in place after a 1999 announcement from the Treasury of the United Kingdom that it would sell half of the country’s gold set off a wave of selling by other European central banks that drove the price of gold to a 23-year low of just $250 an ounce.
The Central Bank Gold Agreeement restored order to the gold markets but it certainly didn’t stop the selling. In the last decade central banks sold 442 metric tons of gold on average each year. Selling peaked at 497 metric tons in the “gold year” that ended in the fall of 2005.
This year? The central banks subject to the agreement sold just 6.2 metric tons, a 96% drop from the previous year. Other central banks not part of the agreement have been net buyers. China almost doubled its gold reserves in calendar 2009 to 1054 metric tons. India, Saudi Arabia, Russia, the Philippines, and Sri Lanka have been buying to build up their gold reserves.
As a whole, central banks are projected to be net buyers of gold for the first time since 1988.
And you were wondering why gold has climbed to near $1300 an ounce? The shiny yellow stuff is trading at $1311 an ounce as I post this.
So how long does this trend last and how far can it drive gold?
I think gold buyers can expect that central banks will stay net buyers for a while yet—but the balance between developed economy central banks and developing economy central banks is tricky.
Central banks in developing economies are under-reserved in gold. The BRIC economies, for example, of Brazil, China, India, and Russia show just 5% gold on average in their official reserves. Gold investors can reasonably expect that these countries will be careful buyers—from current domestic production in the cases of China and Russia.
Central banks in developed economies are over-reserved in gold. On average the countries that use the euro hold 58% of their official reserves in gold. Portugal tops the list at 80% in gold. As gold prices continue to rise, these countries will be tempted to sell part of their reserves. (Central banks have proven to be really, really bad market timers, selling much of their gold near the market bottom. So we’ll see how good they are at calling a top.)
And the balance between developed country selling and developing country buying will be critical for the future price of gold.
So where does that balance come down?
As long as global financial uncertainty remains high, developed country central banks will be reluctant to sell and that will keep the balance on the side of higher gold prices.
No brilliant insight that, I’d readily admit. Fear drives gold prices higher—especially when it keeps potential sellers of gold on the sidelines.
Off Topic: Interesting article on Brazil and its budget as it relates to PBR’s IPO: http://imarketnews.com/?q=node%2F19990
Funny, the gold ads I see are all trying to buy your ‘unused or damaged’ gold items at about 1/2 the bullion rate. I don’t really see many seller ads – maybe I’m not in the right demographic…
Robert, I also see the gold commercials every day, and wonder at what appears to be a classic example of excessive enthusasm. Always funny to hear the commercial say “I’ve owned gold for 10 years and it’s the best decision I ever made…buy your gold where I buy mine…” Of course from a timing perspective, 10 years is the perfect holding period having just missed a steep decline. I don’t know how many are buying gold this way, (arguably the most expensive way to own gold = physical possession of the metal). It does make me hesitate.
But on the other hand… what’s the real argument? Seems to me that even if we are near a high, the real question should be where is the support if Gold does pull back. Gold at 1300 or 1500 or 1100? I guess my solution is look to the miners who are profitable at any of those levels. I’ve seen some of the big names appreciate recently, but I hear the “junior” miners have yet to fully participate. Any names out there that people are looking at?
Large deficits and easy money debases a currency and will eventually equal inflation. Inflation is how the Fed plans to solve the housing problem.
Inflation comes with higher interest rates and higher prices for hard assets. Gold fits the bill as a hard asset but it is acting like a leading indicator and does seem like a risky entry point right now.
I like oil and gas companies for two reasons. First, the dividend pays you for patience and second you have leverage to a hard asset priced in dollars that will increase nicely in value as inflation edges up. If I wanted gold I would buy a miner like Barrick that pays a dividend.
What not to buy? US Dollar Bonds, CDs with more than a year or two maturity and banks. When companies that don’t need money like MSFT and IBM are floating debt that tells me something. Lock in that mortgage now. The rates are once in a lifetime! It is time to be a borrower, not a lender.
Thats my two cents, soon to be worth 1.5 cents! I’m tazman4846 on twitter.
I am not even going to pretend to be the expert…. but..
Gold is at huge Highs ! And there are ads for gold on radio, that should be a warning to anyone.
My charts say gold is Over Bought, still going up, ( volume is dropping ) but with no signal yet of a fall.
The dollar is near a triple bottom, so more likely to go up than down, and gold is demonated in dollars.
I sure would not be a buyer here.