FOR A WORLD-LEADING MARKET turning over $60 billion per day,
London's wholesale gold dealers sure spook easy sometimes.
"I've just heard central banks have been selling. You hear anything?"
asked one breathless contact of BullionVault on Wednesday... just
before the Federal Reserve's $1.25 trillion shot in the arm gamed
the gold price so hard, so fast, the conspiracy theorists at GATA
should demand a Congressional hearing into Ben Bernanke's
long Comex position.
More often than not, however, professional dealers get all
aflutter about rumors of central-bank buying, not selling. In
late 2008, it was supposed to be the Saudis. Last month it was
the Russians – or so gossip claimed. Gossip that the Kremlin
was only too happy to buoy.
Come mid-March, the People's Bank of China (PBoC) fired up
the tittle-tattle – and again, as if on purpose – by forecasting
that despite "safe haven" demand for the US dollar in 2009,
gold prices would "fluctuate at high levels...possibly
breaking through previous highs..."
Now this week a report by the oh-so-sexily-named
Central Banking Publications says that out of 39 reserve
managers controlling $3.2 trillion in official currency and
bullion hoards – some 42% of the world total – well over
one-in-two feels Buying Gold would make a smarter move
today than it did this time last year.
So are the emerging powers hoarding gold today or not?
What's a private citizen trying to look after his or her own
to make of this chatter?
Well, as a rule, it means little or nothing for the price of gold
day-to-day. And like GATA's claims –
highly detailed, much derided – that Western governments
regularly fix the gold market to cap its ascent, rumors of
central-bank buying never prove quite as dramatic as
central-bank action to either defend or debase the
currencies against which it's priced instead.
Raise overnight interest rates to double digits, for instance
as the Federal Reserve's Paul Volcker did in the early 1980s
and non-yielding gold will tumble against high-yielding cash.
Cut and hold rates at zero, in contrast...while creating, say,
$1 trillion of fresh money in a 425-word statement, as Ben
Bernanke did Wednesday...and you'll send Gold Prices higher,
just as surely as the Maestro's apprentice strolling into London
and buying 50 tonnes on his own account.
Investment-house analysts, meantime, are more focused on
the possible 400-tonne sale mooted to help save the world-
saving International Monetary Fund (IMF). Yet the really big
driver so far this year remains mutual-fund managers buying
paper-shares in ETF trusts. Western coin buyers paying
10% mark-ups (or more...!) are meantime wrestling with Asian
scrap-jewelry sellers as to who can tip the balance of apparent
supply and demand.
Large-scale gold purchases by Beijing or the Kremlin would
anyway come at the pit-head, rather than on the open market,
as they look to "slow and steady accumulation" in the words
of UBS's highly-regarded John Reade recently, quoted by the
Buying gold direct from domestic miners was
how South Africa more than doubled its official reserves in the
late 1960s. China and Russia now stand first and fourth among
the world's gold-producing nations. Why announce their
intentions, sticking a premium onto their dealer's offer,
by going through the open market?
But behind the dealing-room noise, however, the cold facts
of Asian, Middle East and Russian gold hoarding point to a
deeper trend – an ugly if grand historical shift that finds its
last cyclical turn almost 10 years ago to the day.
In mid-1999, the Swiss, European and UK central banks
announced gold sales that did indeed shake the market.
Back then, the Gold Price had been tumbling for the best
part of two decades – thanks first to those double-digit US
rates, and then to the fast-growing number of high-return
alternatives for investment cash that sprouted worldwide
as interest rates began to fall back but remained well north
of the rate of inflation.
Prompted by investment-bank advisors and analysts, the
late 20th century's heavy selling by West European
governments coincided not only with both a multi-year
low in the gold price and a bubble in earnings-free tech stocks.
It also came together with Francis Fukuyama's "end of history"
and Tony Blair – the UK prime minister then guilty of bombing
neither Belgrade nor Baghdad – declaring his to be "the first
generation [in Europe] that may live our entire lives without
going to war or sending our children to war."
Put Blair's cant to one side (if you're not retching). Why did
Europe's central banks have so much gold to sell in the first
place? As BullionVault has noted before, the continent's 30-
year scrap between its big nation states was preceded and
worsened by frantic gold hoarding amongst the major players.
Because a government must trust in another's long-term survival
when accepting its paper as payment. Whereas gold bullion, as
former Fed chief Alan Greenspan famously said – and just before
the UK announced its 415-tonne sales back in May 1999 as it
happens – "still represents the ultimate form of payment in
"Germany in 1944 could buy materials during the war only with
gold. Fiat money in extremis is accepted by nobody. Gold is
Why else did the Nazis march straight to seizing the central-bank
vaults on reaching Vienna, Prague and Warsaw? Why else did the
United States grow its hoard from 500 tonnes in 1900 to almost
20,000 by the eve of World War Two...nationalizing privately-held
gold on pain of a $10,000 fine or imprisonment when F.D.R. took
office at the depths of the Great Depression? (See
Hoarding for War, Vaulting for Victory for more...)
Now, two generations later, China's official gold reserves remain
unknown and unknowable to outside observers. But it has become
the world's No.1 gold-mining state thanks to the collapse in South
African output. And the fresh deluge of US money debasement only
confirms why Beijing's bankers "hate you guys" as one policy-maker,
Luo Ping – director-general of
China's Banking Regulatory Commission – put it last month.
"Once you start issuing $1 trillion or $2 trillion," he said to the
Financial Times, five weeks before the Fed issued...ummm...$1.25
trillion of new cash..."we know the Dollar is going to depreciate.
"So we hate you guys but there is nothing much we can do. Except for
US Treasuries, what can you hold? Gold? You don't hold Japanese
government bonds or UK bonds. US Treasuries are the safe haven.
For everyone, including China, it is the only option."
Further west (but only a little, politically), Russia's official gold reserves
have swelled by one-half this decade on the IMF's data, with new
purchases peaking in August 2008 – just as the 58th army rolled into
Georgia to defend South Ossetia's illegal, breakaway republic.
Under Vladimir Putin, the Kremlin said it wanted gold to grow from
2.5% to fully one-tenth of its foreign currency reserves, meaning
four-fold growth of its bullion hoard if not a collapse in its paper a
ssets. Just last month, the central bank stated that it was Buying Gold.
On the available data, it had already added 109 tonnes to its hoard in the
15 months starting Jan. 2007 at a cost of some $27 billion.
Oh sure, that's peanuts compared to the total $4 trillion-worth of gold
now thought to be above-ground at today's prevailing prices. But the
vast bulk of that gold is held as jewelry, not monetary units like coins
or bars. And according to Tsar Putin himself back in 2007, before this
burst of gold-hoarding really got started, the ratio of
Russian government debt to its national gold reserves was already
stronger than for any other state in Europe.
Never mind how wide of the mark that metric was; Putin's claim shows
how much Gold Bullion matters to Russia's political confidence – a
swagger only called into use when debt and foreign currencies slide
into crisis. And then this week, the current Kremlin incumbent, Dmitry
Medvedev, goes and announces that he's "rearming" Russia, using the
very word – "rearmament" – that Europe fretted over and feared all
through its short 20-year peace between the first and second world wars.
Specifically, "[I will] increase the combat readiness of our forces, first
of all our strategic nuclear forces," Medvedev declared Tuesday, piling
historical weight onto Monday's more Cold-War-style news that
Roscosmos, the Russian space agency, is planning a manned lunar
mission for 2015.
Oh, and then there was Sunday's news from Venezuelan socialist
crackpot Hugo Chavez that Russia's long-range Tu-160 "Black Jack"
bombers – each capable of carrying 12 nuclear warheads – are welcome
to use the Caribbean island of La Orchila. You know, just for re-fuelling,
cleaning the windscreen, emptying the ash-trays...but not ever as a
So this isn't the Cuban missile crisis. Not yet at least. But the Kremlin's
new saber rattling must still have caused a shock at the White House –
just as it shocked anyone not tracking Russia's fast-growing gold reserves.
Either that, or Team Obama is so smart, they were expecting some kind of
pre-emptive strike ahead of the Fed's nuclear blast in the T-bond market.
"Foreign demand for long-term Treasuries has disappeared over the last
few months," writes Brad Setser – an ex-US Treasury and IMF official,
former economist for Nouriel Roubini's doom-and-gloom funsters at RGE
Monitor, and a visiting or associate fellow pretty much everywhere worth
having deep thoughts on big subjects. Studying the latest official data
(released Monday) in his blog for the Council for Foreign Relations, "It is
striking that for all the talk of safe haven flows to the US, foreign demand
for all long-term US bonds has effectively disappeared," he explains.
In particular, "Over the past three months, almost all the growth in
China's Treasury portfolio has come from its rapidly growing holdings of
short-term bills, not from purchases of longer-term notes...and it is also
still selling [mortgage] Agency bonds."
All told, China continued to buy US Treasury debt; it is "the only
option" for China, Russia and everyone else at this stage of the game,
as Luo Ping wailed to the FT last month. But of the $12.2 billion China
purchased in January, fully 95% were short-term bills. "Russia also,
interestingly, added to its holdings of short-term Treasury bills," Setser
And then, with the latest Treasury fund-flow data revealed...BOOM!
The Federal Reserve explodes the Dollar by printing $300bn to buy
30-year US debt, plus another $750bn to buy mortgage-agency bonds.
Someone's got to buy this stuff, and the forced buyers of this decade-
to-date are starting to tire. They might just be looking to Buy Gold for
much more than "portfolio diversification" as well.
There. How's that for a gold-market rumor...?
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Where is the Dollar heading? Part 1 - A Must See!
My Note: Rumors or not Gold is up $69.70 On the Day! -
Good Investing - Jschulmansr
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Nothing in today's post should be considered as an offer to buy or sell any securities or other
investments; it is presented for informational purposes only. As a good investor, consult your
Investment Advisor/s, Do Your Due Diligence, Read All Prospectus/s and related information
carefully before you make any investing decisions and/or investments. – jschulmansr