The Secret Return to the Global Gold StandardCommodities / Gold and Silver 2012 Nov 05, 2012 - 06:13 AM GMT
Although it happened more than 40 years ago, many Americans still rue the day back in 1971 when U.S. President Richard M. Nixon effectively took this country off the so-called "gold standard."
Under a true gold standard, paper notes are "convertible" into pre-determined, fixed quantities of the "yellow metal."
What actually happened back in 1971 was that President Nixon - facing huge budget and trade deficits, and a plunging dollar - enacted a series of economic moves, including the unilateral cancellation of the direct convertibility of the U.S. dollar into gold.
By slamming the "gold window" shut, Nixon also brought down the curtain on the existing Bretton Woods system of global financial exchange.
The fallout was immediate, creating a situation that financial historians still refer to as the "Nixon Shock."
Proponents of the gold standard say the real damage is still being wrought: That decision four decades ago led directly to the uncertainty, volatility and irresponsibility that we see in the U.S. economy and global financial markets today.
Whether you agree or not is a topic for another time.
But what I'm here to tell you today is that the world's central banks have quietly - almost secretly - returned the world to a new version of the gold standard.
Back in 2010, the world's central banks became net buyers of gold for the first time since 1988. Buying ramped last year and net purchases exceeded 455 metric tons (tonnes). That was the largest net purchase since 1964.
But the world's central bankers will handily eclipse the 2011 totals here in 2012: They will purchase a projected 493 metric tons this year as they expand reserves to diversify away from the U.S. dollar and protect their countries' economies against inflation, Thomson Reuters GFMS said.
And GFMS said you can expect central banks "to remain a significant gold buyer for some time to come."
Real Asset Returns Editor Peter Krauth told me he completely agrees with that assessment.
As Peter explained: "You can see their thinking, Bill ... you can see them saying: "We have enough of all these fiat currencies in our bank reserves - now we want something that's going to counter those holdings, that's a valuable asset and that has all the right fundamentals in place.' And that asset is gold."
We're seeing the results of this "new gold standard" in the marketplace...
Turkey purchased 6.8 tons in September, and Brazil added 1.7 tons - its first purchase in nearly four years.
The countries that are most-aggressively adding to their yellow-metal reserves include South Korea, The Philippines, Kazakhstan, Russia, Mexico, Turkey, Argentina and the Ukraine.
Gold has risen 11.1% so far in the third quarter and was up 16% on a year-to-date basis. It has outperformed virtually all of the world's top stock markets so far in 2012, according to a report by the World Gold Council.
And here's a key point: Central bankers aren't day-traders. So when they make a move like this, there's generally a long-term time view.
"All the fundamentals are in place for this to continue," Peter told me. "These guys tend to have a long time frame in mind. So when you see a shift like this, it's a big deal. And the chances are that this could last for a very long time."
In a recent report, 24/7 Wall Street did a nifty job ranking and analyzing the Top 10 global gold holders. To understand just how committed the world's central bankers are to this "new gold standard," let's look at a modified version of the news service's rankings and notes.
We'll rate which countries will be buyers, holders or sellers of gold (we're including the International Monetary Fund, or IMF, here as well, which brings our list to 11). And that will give us a big hint about the future direction of gold prices.
And we get to start here at home, with the USA:
1. United States
- Gold Reserves (in metric tons, or tonnes): 8,133.5 tonnes.
- Percentage of Total Foreign Reserves: 75.4%.
- Gross Domestic Product (and Global Ranking): $15 trillion (No. 1 economy).
- Gold Reserves: 3,395.5 tonnes.
- Foreign Reserves Pct: 72.4%.
- GDP (Rank): $3.6 trillion (No. 4).
2a. International Monetary Fund (IMF)
- Gold Reserves: 2,814 tonnes.
- Gold Reserves: 2,451.8 tonnes.
- Foreign Reserves Pct: 72%.
- GDP (Rank): $2.2 trillion (No. 8).
- Gold Reserves: 2,435.4 tonnes.
- Foreign Reserves Pct: 71.6%.
- GDP (Rank): $2.2 trillion (No. 5).
- Gold Reserves: 1,054.1 tonnes.
- Foreign Reserves Pct: 1.7%.
- GDP (Rank): $7.3 trillion (No. 2).
- Gold Reserves: 1,040.1 tonnes.
- Foreign Reserves Pct: 11.5%.
- GDP (Rank): $660 billion (No. 19).
- Gold Reserves: 936.7 tonnes.
- Foreign Reserves Pct: 9.6%.
- GDP: $1.85 trillion (No. 9).
- Gold Reserves: 765.2 tonnes.
- Foreign Reserves Pct: 3.2%
- GDP (Rank): $5.86 trillion (No. 3).
9. The Netherlands
- Gold Reserves: 612.5 tonnes.
- Foreign Reserves Pct: 59.8%.
- GDP (Rank): $838 billion (No. 17).
- Gold Reserves: 557.7 tonnes.
- Foreign Reserves Pct: 10%.
- GDP (Rank): $1.82 trillion (No. 10).
Conclusion: If you're a true "gold bug," or are just an investor who's bullish on gold, you have to like what this list of the world's biggest holders of gold says about the direction of gold prices for the next few years. It's highly bullish.
Here's why. Even with the problems we see in Europe, none of the biggest holders look to be really huge sellers. And the buyers on this list look to be big buyers.
Remember, too, that the lion's share of the most-aggressive buyers - South Korea, Turkey, some nations in Africa, and the many others - aren't even on this list.
And here's one other great point that Peter made as we talked late last week: These secular trends tend to be pretty steady, on both the downside and the upside.
The fact that central banks were out of the gold market from 1988 to 2010 - 22 years - says that they'll be in the market for a long stretch, too.
"Even if you look at this conservatively, it's clear that we're just at the start of this - meaning the central bankers are going to be buyers for an extended period," Peter said. "Even if this upturn in buying only lasts half of [the 22 year downturn], we're talking 11 years - meaning we're only two years into this."
And that tells us there's plenty of money to be made from this no-longer-secret global return to the "gold standard."
"Some investors look at the current price of gold, and view it as expensive because it's more than doubled in the last few years alone," Peter said with an audible chuckle. "But given what I see coming at us, I can say this with a high degree of confidence: Three or four years from now, we're going to look back on this as a period when gold was still cheap, and where the profit potential was vast, because of where prices are going to go from here."
To how Peter is playing this bullish trend in gold, silver and other metals, click here.
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