The World's Central Banks are Stockpiling Gold - And You Should Too
The European Central Bank (ECB) has officially joined the chorus of influential central banks which are stockpiling gold bullion. With the ECB now growing its physical bullion reserves, gold-bugs are in some high-powered company.
It's no wonder the ECB has joined the parade of gold-bugs. The yellow metal is racing to surpass its nominal all-time high of US$850 an ounce it set in January 1980. Gold currently trades at a 27-year high - just US$105 dollars below its all-time high.
For gold to truly be in a secular bull market, it must rise against all major currencies, and that's exactly what's taking place now. In fact, spot gold prices have been rising against all major currencies since 2005. Over the last 12 months alone, gold has gained 29% in U.S. dollars, 19% in euro, 28% in yen and 18% versus the soaring Canadian dollar.
The latest statistics for September, courtesy of the ECB, show the Frankfurt-based institution accumulated €14.36 billion worth of gold (US$20.3 billion). This means they now have a total of €186.3 billion (US$263.6 billion) in their reserves. That's, an 8.2% increase compared to August 31 and a 3.2% rise in aggregate reserves since March (latest figures available).
Who Took all the Gold?
Bull markets, especially in raw materials, are predicated on supply and demand fundamentals. To a lesser extent, raw materials also follow the direction of the U.S. dollar and interest rates.
Over the last several years, severe commodity shortages have resulted in incredible gains for investors. Savvy investors have literally cleaned up on supply deficits in the base metals, the grains, lean hogs and other foodstuffs has resulted in incredible gains for investors. Gold bullion is next on the supply shortage list as production continues to decline.
Global gold production peaked in 2001 at 2,604 tons or 83.7 million ounces. In 2006, gold production stagnated to 2,467 tons. That's a 5% decline. It's predicted gold will post another single-digit decline in 2007 as production bottlenecks and strikes in South Africa, the world's largest gold producer, continue this year.
Annual gold mining supply has declined by 4.4 million ounces since 2001. Over the last six years, gold prices have risen from US$260 an ounce to US$745 an ounce - a 186% rise.
While the majority of central banks typically have the worst sense of market timing, several institutions in Europe, Latin America, Africa and especially in Asia, have been busy accumulating physical gold this decade.
But at the same time, many major market economies (namely Spain) and several producing nations, including Canada and Australia have been dumping gold this summer.
Despite Massive Central Bank Sales, Gold Rockets Higher
But what's truly impressive about this gold bull market is the ongoing parade of central bank sales since 1999. Despite regular central bank dumping, the gold market has easily absorbed several million tons over the last eight years.
The first Central Bank Gold Agreement (CBGA), originally signed in 1999, covered a five-year period regulating the amount of central bank gold sales to 2,000 tons. The maximum sales quote permitted under the terms of the second CBGA is 500 tons annually, or 2,500 tons from 2004 to 2009.
Although statistics aren't available on cross-border sales, including central bank purchases, it's fair to assume that several large central banks in the emerging markets continue to recycle their devalued U.S. dollar exchange reserves into gold bullion.
Who's Buying All this Expensive Gold?
The emerging markets are an incredibly different asset class in 2007 compared to just 10 years ago. They're wielding enormous influence on capital markets.
Back in 1997 and 1998, most countries were either nearly bankrupt or suffering from a financial meltdown. But since 2002, many of these countries have benefited from the commodity bull market, and enjoyed record net trade surpluses and bulging foreign-exchange reserves.
Russia, China, Argentina, South Africa and several other smaller emerging market countries are the most significant buyers of gold since 2003. And in terms of fabrication demand, India is by far the largest consumer of gold jewelry, followed by China, Turkey and Russia. Even as gold prices have almost tripled since 2001, fabrication demand has not waned - in fact, it's actually soared!
The Power of Emerging Markets and Sovereign Wealth Funds
In addition to emerging market purchases this decade, oil-rich countries and sovereign wealth funds continue to trade U.S. dollars for physical gold as an alternative investment amid a plunging dollar since 2002.
Sovereign wealth funds, created by governments to invest assets worldwide, seek higher returns on capital. These funds have increasingly sold staid U.S. Treasury bonds as the dollar has declined. These influential companies, overseeing an estimated US$1.3 trillion dollars, continue to assume stakes in public companies, private equity, real estate, the euro and gold.
The bull market in gold is now running on all cylinders in late 2007. In a testament to bullion's ultimate value as a store of monetary wealth, it is now regaining its importance as a strategic asset among many central banks tired of holding not only depreciated dollars, but other fiat currencies that have significantly declined vis-à-vis gold.
The current trend among central banks may also herald a return of the gold standard. We could see a future monetary regime similar to the now defunct Breton Woods agreement that would include the world's largest economic powers' currencies and commodities. If that is a possibility, then US$750 gold is extremely undervalued in nominal terms.
If gold is good enough for the ECB and other central banks, it's good enough for every investor. That's especially the case, if you're seeking to hedge paper money and protect your purchasing power in an environment of growing monetary and financial instability and ultimately, higher inflation.
It's no wonder the ECB has joined the parade of gold-bugs. The yellow metal is racing to surpass its nominal all-time high of US$850 an ounce it set in January 1980. Gold currently trades at a 27-year high - just US$105 dollars below its all-time high.
For gold to truly be in a secular bull market, it must rise against all major currencies, and that's exactly what's taking place now. In fact, spot gold prices have been rising against all major currencies since 2005. Over the last 12 months alone, gold has gained 29% in U.S. dollars, 19% in euro, 28% in yen and 18% versus the soaring Canadian dollar.
The latest statistics for September, courtesy of the ECB, show the Frankfurt-based institution accumulated €14.36 billion worth of gold (US$20.3 billion). This means they now have a total of €186.3 billion (US$263.6 billion) in their reserves. That's, an 8.2% increase compared to August 31 and a 3.2% rise in aggregate reserves since March (latest figures available).
Who Took all the Gold?
Bull markets, especially in raw materials, are predicated on supply and demand fundamentals. To a lesser extent, raw materials also follow the direction of the U.S. dollar and interest rates.
Over the last several years, severe commodity shortages have resulted in incredible gains for investors. Savvy investors have literally cleaned up on supply deficits in the base metals, the grains, lean hogs and other foodstuffs has resulted in incredible gains for investors. Gold bullion is next on the supply shortage list as production continues to decline.
Global gold production peaked in 2001 at 2,604 tons or 83.7 million ounces. In 2006, gold production stagnated to 2,467 tons. That's a 5% decline. It's predicted gold will post another single-digit decline in 2007 as production bottlenecks and strikes in South Africa, the world's largest gold producer, continue this year.
Annual gold mining supply has declined by 4.4 million ounces since 2001. Over the last six years, gold prices have risen from US$260 an ounce to US$745 an ounce - a 186% rise.
While the majority of central banks typically have the worst sense of market timing, several institutions in Europe, Latin America, Africa and especially in Asia, have been busy accumulating physical gold this decade.
But at the same time, many major market economies (namely Spain) and several producing nations, including Canada and Australia have been dumping gold this summer.
Despite Massive Central Bank Sales, Gold Rockets Higher
But what's truly impressive about this gold bull market is the ongoing parade of central bank sales since 1999. Despite regular central bank dumping, the gold market has easily absorbed several million tons over the last eight years.
The first Central Bank Gold Agreement (CBGA), originally signed in 1999, covered a five-year period regulating the amount of central bank gold sales to 2,000 tons. The maximum sales quote permitted under the terms of the second CBGA is 500 tons annually, or 2,500 tons from 2004 to 2009.
Although statistics aren't available on cross-border sales, including central bank purchases, it's fair to assume that several large central banks in the emerging markets continue to recycle their devalued U.S. dollar exchange reserves into gold bullion.
Who's Buying All this Expensive Gold?
The emerging markets are an incredibly different asset class in 2007 compared to just 10 years ago. They're wielding enormous influence on capital markets.
Back in 1997 and 1998, most countries were either nearly bankrupt or suffering from a financial meltdown. But since 2002, many of these countries have benefited from the commodity bull market, and enjoyed record net trade surpluses and bulging foreign-exchange reserves.
Russia, China, Argentina, South Africa and several other smaller emerging market countries are the most significant buyers of gold since 2003. And in terms of fabrication demand, India is by far the largest consumer of gold jewelry, followed by China, Turkey and Russia. Even as gold prices have almost tripled since 2001, fabrication demand has not waned - in fact, it's actually soared!
The Power of Emerging Markets and Sovereign Wealth Funds
In addition to emerging market purchases this decade, oil-rich countries and sovereign wealth funds continue to trade U.S. dollars for physical gold as an alternative investment amid a plunging dollar since 2002.
Sovereign wealth funds, created by governments to invest assets worldwide, seek higher returns on capital. These funds have increasingly sold staid U.S. Treasury bonds as the dollar has declined. These influential companies, overseeing an estimated US$1.3 trillion dollars, continue to assume stakes in public companies, private equity, real estate, the euro and gold.
The bull market in gold is now running on all cylinders in late 2007. In a testament to bullion's ultimate value as a store of monetary wealth, it is now regaining its importance as a strategic asset among many central banks tired of holding not only depreciated dollars, but other fiat currencies that have significantly declined vis-à-vis gold.
The current trend among central banks may also herald a return of the gold standard. We could see a future monetary regime similar to the now defunct Breton Woods agreement that would include the world's largest economic powers' currencies and commodities. If that is a possibility, then US$750 gold is extremely undervalued in nominal terms.
If gold is good enough for the ECB and other central banks, it's good enough for every investor. That's especially the case, if you're seeking to hedge paper money and protect your purchasing power in an environment of growing monetary and financial instability and ultimately, higher inflation.
1 comment:
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