Central Banks Buy Gold
By Staff News & Analysis - March 26, 2010

Central banks around the world added 425.4 metric tons of gold to their reserves last year, the biggest increase since 1964, according to the World Gold Council. That represents a 1.4 percent gain to put their holdings at 30,116.9 tons in total. The increase was the first since 1988. Central banks in India, Russia and China were among those boosting their gold reserves last year, as the precious metal jumped 24 percent, hitting a record of $1,226 an ounce in December. Central banks now possess 18 percent of all gold ever mined. "There's clearly been a renaissance of gold in central bankers' minds," Nick Moore, an analyst at Royal Bank of Scotland, told Bloomberg. "It's not just been central banks taking on gold, but a general shift for physical gold in the investment sector." Many are now singing gold's praises, with the precious metal up about 3 percent so far this year. "Gold is quietly, at the edge, becoming the world's second reservable currency, supplanting the euro and rivaling the dollar," money manager Dennis Gartman wrote in his Gartman Letter, obtained by Bloomberg. "The trend shall continue months, if not years, into the future." – MoneyNews

Dominant Social Theme: Gold is good?

Free-Market Analysis: So now the West's central banks are buying gold. They couldn't sell enough of it when the yellow metal was priced around US$250 just about a decade ago. But now that it is well over US$1,000 they can't buy enough. This alone should disabuse people of the notion that central bankers are wise and efficient utilizers of the vast money power that they have control over. Like the rest of us, central bankers sell low and buy high.

What other reasons could central banks have for buying gold? Well, a buying spree such as this may indicate that central bankers believe gold still has a relatively good upside – and we'd probably agree. Also, as gold goes up in price, it becomes a far more important barometer for the larger economy. Central bankers are probably loath to leave so much of this important stuff in people's hands. They want all they can get at this point because in our estimation central banks do only two things well or at least relentlessly – inflate paper money by printing too much of it and manipulate the price of precious metals.

Once one understands the battle between elite-controlled central banks and the rest of us, then the economic war that is constantly being played out in Western society becomes clearer. Central banks, to boil it down further, are essentially machines empowered to control money as much as possible. During a time when economies are subdued and the price of gold is quiescent, the West's mercantilist central banks come into their own by printing vast gobs of money. This is enormously enriching to the power elite that stands close to the money spigot and helps itself as necessary.

But when economies are unwinding, when price inflation threatens and when the price of commodities and gold in particular have gone up a great deal, central banks are faced with a different dilemma. Now money printing by itself cannot control an economy. The power to use money as a level has partially passed out of the hands of central banks. That power now resides in money metals, gold and silver. (Yes, silver, too, is inevitably drawn into this production.)

If central bankers want to continue to exercise power over money, they have to control the substance in which value resides – and that would now be gold from their perspective. The trouble is that gold is a lot more difficult for central banks to control and manipulate than paper money. Paper money can be printed but gold needs to be dug out of the ground or purchased at great expense with eroding fiat currency.

It is, to be sure, a somewhat hypocritical enterprise – a dominant social theme, if you will. Western consumers are told endlessly during a time of paper-money ascendancy that gold is a "barbaric relic" and not a good store of value. But every 30-50 years, gold prices (and silver too) appreciate dramatically as the value of paper money implodes due to over-printing. This is an obvious and foreseeable occurrence. Not only that, one can also see that the financial industry itself is in cahoots with central bankers because the Western financial community carries the message about gold's inessential nature and barbaric status.

As the prices of gold and silver move upwards (and historically there are linkages between the prices) there will likely be increased efforts by central banks to control the exploding value of money metals versus paper money. The more gold that central banks own, the easier it is – or at least the more feasible it is – that the sharp upward spikes can eventually be tamed and controlled. This is most important to the central banking establishment, which is always uncomfortable when gold and silver are in the ascendancy and paper money is collapsing toward its real net worth … of zero.

The acquisition of increased gold supplies by central banks should likely be seen by the savvy investor, as a sign that gold (and silver) have a ways to travel pricewise. It is also a sign in our opinion that an effort will eventually be made (indeed, it is always ongoing) to rein in precious metals prices through some sort of market manipulation. This has been the case in the past (certainly in the 1970s) when similar situations arose. When and if the prices of gold and silver are reduced considerably, the power elite can reignite one of the basic themes in its arsenal – that gold is a barbaric relic of a distant era, etc.

Here is perhaps the most interesting part of the above article excerpt we've analyzed, and we've saved it for the conclusion. It is as follows: "'Gold is quietly, at the edge, becoming the world's second reserve currency, supplanting the euro and rivaling the dollar,'" money manager Dennis Gartman wrote in his Gartman Letter, obtained by Bloomberg. 'The trend shall continue months, if not years, into the future.'" This is EXACTLY what the Bell has been predicting for over two years now (and actually much longer in other incarnations).

After Thoughts

Precious metals standards do not, in fact, need elaborate governmental interventions to be installed (just another meme in our opinion). Honest money becomes the standard of the land by evolution, as people turn to gold and silver while paper currency collapses. One need make no complex prognostications about how to "reintegrate" a precious metals standard into society. If paper money loses enough credibility, it will simply happen. It already is, according to Gartman. We are not surprised, and neither are you.