Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Gold Stocks Benchmark Battle - 30th July 16
Top 10 Pokemon GO Playing Tips, Tricks and Secrets! - 30th July 16
Asset Bubbles Tend to Crash with a Vengeance - 29th July 16
Retirees Are Risking Their Life Savings on Junk Bonds - 29th July 16
The Next Recession is Coming - Expect Around 0% Returns for the Next 7 Years - 29th July 16
SPX is Shaking and Rolling - 29th July 16
Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - 28th July 16
FOMC Interest Rates and Their Impact on the US Economy - 28th July 16
The State Of The Economy - 28th July 16
Elliott Wave Crash Course - 3 Ways the Elliott Wave Principle Enhances Your Trading - 28th July 16
Japan's "Helicopter Money" Play: Road to Hyperinflation or Cure Debt Deflation? - 27th July 16
Monetary Zika - The Insidious Nature of Credit Expansion - 27th July 16
Gold and Pork Bellies - 27th July 16
Silver Is Insurance Against The Worst Part Of This Depression - 27th July 16
Don’t Buy The SPX Hope Stock Market Rally! - 27th July 16
Bitcoin $650 Still in Play - 26th July 16
Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - 26th July 16
The Forex Markets Are Getting Exciting! - 26th July 16
Underpriced Silver Is the “Rip Van Winkle” Metal - 25th July 16
Declines in Multiple Market Indexes - 25th July 16
Retailers Are Doomed as Most Americans Are Too Poor to Shop - 25th July 16
Here’s One Currency That Could Go to Zero - 25th July 16
Stock Market Top is Expanding - 25th July 16
Silver Manipulation – Because They Needed the Eggs - 25th July 16
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

Central Bank Gold Joining the Dots

Commodities / Gold and Silver 2012 Jan 28, 2012 - 02:46 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleYes, central banks are holding more gold. But they're holding very much more wood-pulp on top...

THE GOLD PRICE on Wednesday broke up through the downtrend starting at last summer's record high. Or so a technical analyst studying the price chart would tell you.


But just as in late 2007 – from where gold began a 55% run inside 6 months – this week the price of gold bullion jumped on news that is fundamental: the price of money, specifically Dollars, the world's #1 currency for trade and central-bank reserves.

Back in 2007, the catalyst came as a baby-step rate cut of 0.25%, signaling the Fed's switch from raising to destroying the returns paid on cash savings. Now the Fed's new zero-rate promise "took gold comfortably clear of the 50, 100 and 200-day moving averages, and opened up some big targets to the upside," says one London technician. The previous ceiling of $1700 has become a support level according to bullion bank Scotia Mocatta, "with further key support at the 200-day moving average at $1645."

Whatever you make of such numbers, it's worth stepping back to see the wood for the trees. Because the trend in who's buying gold, and why, is so plain to spot that you hardly need join the dots.

Gold bullion holdings amongst the world's central banks, for instance, have risen to a 6-year high, according to data compiled by the International Monetary Fund. Emerging and developing nations have swollen their gold reserves 25% by weight since 2008. The debt-heavy West is a net seller, but only just.


"There's a perception perhaps that gold is no longer a crucial part of the financial system in the way that it was under the Gold Standard before 1970, 1971," as Marcus Grubb of the World Gold Council put it in an interview with Tekoa Da Silva this week. "But in fact that's not really true.

"Because even with the ending of the Gold Standard, gold remains as an asset held by the world's central banks...and you've seen a trend recently for gold to become more and more a part of the fabric of the financial system."

A good chunk of this weaving is due to official reserves. But as our chart shows, central banks control a shrinking proportion of what's been mined from the ground. A far greater tonnage of gold again is finding its way into private ownership, and there – as Marcus Grubb notes – it's having a greater still impact on how money and finance work.

First, private individuals have led the rediscovery of gold as a financial asset, rather than the decorative store-of-value it had become by the close of the 20th century. So now, China's giant bank ICBC for instance is holding gold for the "accumulation" savings of 2.3 million citizens, a program developed in partnership with the World Gold Council. Also the WGC partners with BullionVault, amongst several other private-investor providers worldwide. But institutional finance is catching on, and gold is now in front of the Basel Committee on global banking, proposed as a "core asset" for banks to hold – and count as a Tier 1 holding – for their liquidity requirements.

After all, turnover in London's bullion market, center of the world's gold trade, is greater at $240 billion per day than all but the four most heavily traded currency pairs worldwide. So its liquidity is barely equaled. Turkey's regulators already acknowledged physical gold bullion as a Tier 1 asset for its commercial banks starting in November, with the cap of 10% worth some 5.5 billion Lira ($2.9bn) according to Dow Jones. And a growing number of investment exchanges, meantime, as well as prime brokers, now accept gold as collateral, posted as downpayment by institutions against their commodity and other leveraged positions.

Gold bullion pays no interest of course. But in our zero-yielding world, that only puts it ahead of where the capital markets are being herded by central-bank policy anyway. Nor does gold have much industrial use (some 11% of global demand in the 5 years to 2011), a fact which highlights its unique "store of value" attributes. Being physical property, gold is no one else's debt to repay or default. Being globally traded, it's deeply liquid and instantly priced. And being both rare and indestructible, it couldn't be any less like "money" today.



Scarcely a lifetime ago, gold underpinned the globe's entire monetary system. Outside China, which tried sticking with silver, the compromised and then bastardized Gold Standard which followed first World War I and then World War II still saw the value of central-bank gold reserves vastly outweigh the paper obligations which those banks gave to each other.

Even three decades ago, 10 years after the collapse of what passed for a Gold Standard post-war, central-bank gold holdings still totaled some three times central-bank money reserves by value. But look at the decade just gone – the 10 years in which gold investment beat every other store of value hands down. Pretty much every currency you can name lost 85% of its value in gold. Yet the sheer quantity of new money pouring into central-bank vaults saw their gold holdings only just hold their ground.

Gold's rise, in short, has been buried under wood-pulp. To recover its share of central-bank holdings as recently as 1995 would now require a further doubling in value. To get back to the 1980s' average would require a 15-fold increase. Or, alternatively, a 93% drop in the value of foreign currency reserves relative to central-bank bullion holdings.

Such a trend is not yet in train, neither on the charts nor the fundamentals. The US Dollar remains the biggest reserve currency, weighing in at 62% of stated reserves according to IMF data, down from its peak above 71% in 2001 but more than equal to its share in the mid-1990s. Even so, as former FT columnist and current capital-markets editor at The Economist Philip Coggan writes in his latest book, Paper Promises:

"If Britain set the terms of the Gold Standard [1870-1914], and America set the terms of Bretton Woods [1944-1971], then the terms of the next financial system are likely to be set by the world's biggest creditor – China. And that system may look a lot different to the one we have become used to over the last 30 years."

Coggan rightly notes that China isn't the only large creditor, and nor does it hold anything like the dominance which the US held at the end of World War II. But whether this switch starts today or only starts to show 10 years from now, such a change of direction can't be discounted to zero. Repudiation of government debt – the form which most foreign currency reserves take – will only begin with the Greek bond agreement, perhaps leading first to a rise in US Dollar holdings but also highlighting the ultimate risk of paper promises.

That fear, of having to write off money in default or devalued, is already driving the rise in central-bank gold purchases.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife