Does Central-Bank Buying Signal the Top?

Doug Casey told me in January, “The only thing that scares me is that central banksare buying a lot of gold; they’re historically contrary indicators.” When it comes tobuying gold, central banks have such a poor timing record that they’re frequentlyjoked about as a contrary indicator.
We dislike referring to tonnes of gold instead of ounces. Gold is priced by the ounce. But certain market playersespecially central banks, report gold transactions in tonnes. One metric ton (tonne) equals 32,150.7 troy ounces.
Recentlythey have been buyingquite literally, tonnes of itConsider the following:
  • Net central-bank purchases in 2011 exceeded 455 tonnes. This was only the second increase since 1988 (the first in 2010) and the largest since 1964.
  • Turkey has added over 123 tonnes since last Octoberbuying 29.7 tonnes in April alone.
Mexico has purchased over 100 tonnes since February 2011.
  • The Philippines added 32 tonnes in March, its second-largest monthly purchaseeverLargely under the radar is the fact that it’s buying some of its local production.
  • Russia continues buyingadding 15.5 tonnes in May. Its total reserves nowstand at 911.3 tonnes, the highest level since 1993.
  • Thailand has raised its holdings by more than 80% since mid-2010.
  • South Korea has bought 40 tonnes since May 2009, an increase of 180%.
  • The World Gold Council (WGC) reported that central-bank purchases totaled80.8 tonnes in Q1 2012, about 7% of global demand.
  • Over the past 12 months, net purchases have averaged almost 20% of totalannual supply.
Here’s the picture of what has transpired since the financial crisis hit in late 2008.
Central banks have added a net of 1,290 tonnes since the fourth quarter of 2008. This total excludes China and other nations that don’t regularly report their activity, as well as countries that have been surreptitiously buying their own production.
That’s a lot of gold buying. One has to wonder whether so much buying may in factsignal a top for gold. After all, a number of prominent analysts have claimed for sometime that gold is in a bubble and that it’s all downhill from here.
Not so fastLike many mainstream reports, looking at the short-term picture usuallyleads to erroneous conclusions. Let’s put central-bank purchases into historicalperspective.
In spite of the recent activity, world central-bank holdings are far below what theywere in 1980. Clearlya few years of net buying does not a bubble make.
The difference is greater than you might realizeConsider that since 1980…
  • The global population has grown 55%
  • Worldwide gold supply has grown 120%
  • Foreign-exchange holdings have increased 650% since 1995, and now total $10.4 trillion.
It seems rather obvious that a lot more “catch-up” buying is needed before we starttalking about a top for gold on this basis.
Meanwhilewe think the trend of central-bank gold buying will continue. It’s not hard to see why: central bankers around the world know what it must ultimatelymean to run the printing presses the way the US has since 2008, even if priceinflation is not immediately obviousIt’s no surprise that they want to hedge theirbetsmoving more reserves into something with actual value… something that can’tbe debased with a few keystrokes. The US dollar has been the world’s reservecurrency since WWII, and that’s beginning to change – the movement into gold isjust one facet of that change.
The entire world may indeed be beginning to understand that it’s operating on a fiatcurrency system backed by nothingAt the same time, the sovereign debt crisis in the Eurozone is intensifying, and some countries have succeeded in inflating theircurrencies faster than the Fed has inflated the USD. It doesn’t take Nostradamus toread this writing on the wall… and while the world’s central bankers can lie to the public, they themselves know how bad things are.
In fact, the WGC is so confident that central banks will continue to buy gold that it’schanged its reporting structure: it’s added “official sector purchases” as a newelement of gold demandwhile eliminating “official sector sales” as a negative supplyfactor.
Of course, gold will someday top, and Doug Casey believes a bubble in gold andrelated equities is highly likely at some point, courtesy of the trillions more currencyunits governments will create in a desperate (and ultimately unsuccessfulattemptto stave off the Greater Depression.
But we’re nowhere near that point. There’s a long way to go before we startlegitimately using the “B word” (bubble) or “S word” (sell).
In the meantime, I suggest using the “B word” (buy) or “A word” (accumulate) tomake your decisions about gold.
While we’re convinced that buying gold and silver right now will providehandsome rewardsmuch more money will be made by investing in companiesthat mine these precious metals. For investors with an appetite for risk, thereally big paydays will come from speculating in the best of the best juniorminers.
You can get the latest scoop on the most promising juniors at the upcomingCasey Research/Sprott, Inc. Navigating the Politicized Economy Summit in Carlsbad, California.
Our own Louis James will be on hand to update attendees on his latest fact-finding mission, which includes upcoming visits to under-the-radar miningoperations in China that he believes could yield life-changing gains. Joininghim will be a host of financial luminaries and former government officials whowill highlight the risks and opportunities that today’s troubled economypresentsReserve your seat before July 31 to receive $300 off of Summitregistration.

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