Thursday, March 18, 2010

Central Banks Rapidly Accumulating Gold: What's the Message?

Bloomberg News reported this morning that Central Banks globally in 2009 increased their gold reserves for the first time since 1988 at the fastest pace since 1964. Moreover, 2009 saw a general movement of investment globally into gold: “There’s clearly been a renaissance of gold in central bankers’ minds,” said Nick Moore, an analyst at Royal Bank of Scotland Group Plc in London. “It’s not just been central banks taking on gold, but a general shift for physical gold in the investment sector” (LINK).

We know that China, Russia and India are hoovering gold. And we know that the European Central Bank system has not sold any gold for several weeks and is on track to fall well short of its yearly sales quota of 400 tonnes. We don't know what the U.S. Fed is doing with its gold, as there is absolutely no transparency on this matter. The U.S. gold reserves have not been independently verified or audited since Eisenhower was President and every attempt to obtain information about the gold using the Freedom Of Information Act has been denied by the Fed. A lawsuit by GATA seeking to force the Fed's hand is currently pending in the U.S. district court in DC.

I believe that the massive accumulation of gold by Central Banks represents a gradual movement from a global currency system that is based on fiat - "full faith and credit" (i.e. "trust us") - to one which will be based on a currency system with some kind of hard asset backing, and that the hard asset will be gold. I'm not alone with this view, and as nauseating as it is for me to quote Dennis Gartman, he is of the similar view as me (from the Bloomberg link above):  “Gold is quietly, at the edge, becoming the world’s second reservable currency, supplanting the euro and rivaling the dollar," Dennis Gartman, a Suffolk, Virginia-based economist and hedge-fund manager, said in his Gartman Letter today. “The trend shall continue months, if not years, into the future."

It will take some time and a considerably higher price of gold in order to accomplish a gold-backed currency system.  Historically, when the world has operated under such a system - which was really up until the Bretton Woods Agreement in 1944, Central Banks held 40% of their currency reserves in gold.  Consider now that most CB's hold well under 10% of their reserves in gold.  Given the declining output in gold -something which can be partially remedied by a much higher price of gold, which would stimulate more exploration and production - it will take a significantly higher valuation price for gold in order to achieve this historical 40% reserve metric.

Thus, the message of the market with respect to gold is clear:  smart investors should shift a considerable portion of their investment portfolio into gold (and silver and mining stocks) and the price of gold is going to go much higher for several years.  If you think I'm whacked out in my view, please take a few minutes to read this essay on using gold as a currency backing written by none other than Alan Greenspan in 1966:  GOLD AND ECONOMIC FREEDOM


  1. dave, omg when r most of the junior miners going to get some life in their stock price action?!?! They haven't done didley squat since the plunge of 08!!!

  2. Great question. Was just discussing that with a good friend who has most of his personal wealth tied up in juniors and is an executive at Colo-based junior mining company.

    In reality, they haven't had an life since their 2003 to May 2006 run.

    I'm not really sure. I expected that when gold got over $1000 and held, the juniors would see some flow. But hell, even the HUI hasn't gotten back to its Spring 2008 high.

    I think the mining stocks overall, and especially the juniors, are incredibly undervalued right now. Your guess is as good as mine as to when the stock prices will catch up to fundamentals. Usually the mining stocks make big runs over a short period of time. We are overdue to have one of those runs sometime this spring.

  3. where do you get such great info?

  4. Some d-bag with a name similar to your's who I've traded miners/gold with about 7 years...thanks for the heads up LOL

  5. Dave,
    at a time when banking is clearly showing the error of the fractional lending mindset gold makes a good insurance policy.

  6. Fractional banking and fiat currency is the napalm and nuclear bomb of any economic system. History is the acid test for that. Gold is honest money. In fact, an argument can be made that most, if not all, of our economic/political problems, and some societal, can be traced to the use of fiat currency vs. gold. That's why gold has been used as honest money for about 90% of the last 5000 years. That's a fact you can look up.

  7. No need to look up, I actually knew that one! HA!

    Just got in some Silver Maple Leafs and they are so much better than paper money!

  8. Nice GYC! On days when they smash the metals, pour a few rolls all over your bed and roll around naked in them - you'll feel better LOL.

    Silver Mapes and Eagles are just beautiful coins.

  9. Edwardo, did you see the Bret Baier/Obama interview clips? Watch that and you'll really get fired up to do something. Obama lied, was arrogant and avoided answering any direct, touchy questions. I couldn't believe it. Someone should set up a giant projector and show video footage projected onto the side of the White House of Obama during his campaign and debates promising to bring transparency, honesty and reform to DC...Haaa!

  10. Maples are my favorite, though the Aussie Kookaburra coins are great but the premiums are outrageous! I did get a 10 ounce 2000 lunar dragon coin for my personal birthday gift, I am weak, I know! I was born in the year of the Dragon (1976)

  11. Nice! I wish someone gave me bullion coins for my birthday LOL.

    I own Austrian Philharmonics because I like the coin and it trades at the lowest premium to spot of the .9999 coins. But Tulving has Pandas for $35 over and I bought a bunch for our fund. Back in early '08 when coin spreads in gold went nuts, Pandas were trading at higher spreads than Eagles. I think we'll see that again.

  12. Dave I've been fired up to do something for a long time. This is just a bit of kindling on an already well fueled blaze.

    I saw the evasiveness from Obama. I saw the the nose bleed level of bullshit that is typical of most pols who have the talent for answering the questions they want to answer instead of the ones that are posed. I did not see arrogance-though clearly the O Administration acts arrogantly- which I define as a posture of superiority and self importance. Obama held his ground, but he did it, by and large, politely and firmly, not in a high handed way. I'm afraid I can't fault him on style points.

    I think it's important to stress that Fox never sicced anyone on Bush the way they sicced this interviewer on Obama which is too bad. But then Fox is, for all intents and purposes, an organ of the The Republican party who I hold in absolute contempt. Unfortunately, I also hold The Democrats in the lowest possible esteem.

    Having said all that here are a few thoughts:

    Obama said:

    "I don't spend a lot of time worrying about what the procedural rules are in The House or The Senate."

    Under David Dreier, Republicans used the self executing rule thirty five times. I would really like to know what Obama's stand was on that legislative procedure at the time. We know where Pelosi stood. Did Obama, no pun intended, follow suit? A good journalist would have come prepared with any information that might be "illuminating" given the present contretemps.

    Both parties are a cancer on the nation, and the political system is corrupted beyond redemption. Obama must go. Bush should've gone.

  13. Totally agree w/everything you said and for sure Fox is anything BUT "fair and balanced." And if I wanted to watch Bush bashing, I watched MSNBC.

    BUT, Bush never promised transparency, honest and reform. Obama set himself to be brutalized by anyone willing to call him on his shit. Fox does that. As for his arrogance, rewatch the part where Baier asks him about Connecticut and watch how Obama responds. He's douchebag.

    I hated Bush as much as anyone could hate Bush, but I hate Obama even more because Bush never led us to expect anything different than that which he delivered. Obama has turned into the biggest liar in the Oval Office that I've ever observed.

  14. everyone but the western banks are buyers......US (maybe 2000mt not the 8000 most media believe i would say), UK (310mt or less) and Canada (3mt or 3mt of paper the most likely scenario, its easy to find tree's there)

    not much talk about the middle east buying gold but one would assume that they are buying a crap load of gold behind the scene's for the oil they give as collateral.

    asian and european banks are on a buying spree and are making up for all the selling by the western banks. you would have to think that china is closing in on 2000mt by now since they keep all their production and are working on getting more behind the scene's not in the scene's through the IMF like most believe. i say this year they give out another shocker in their actual reserves.

    as Another says, 80% of the gold being traded will never be seen and it is this that will one day get everyone upset and hoard gold. just know that gold is the only money accepted for the most important commodity oil.

    remember the last time their was a shortage of gold in late 2008, gold bought 27 barrels at the peak compared to the 14 which is the norm and is the current number today. many pepole looked at the paper price of this oil collapse to $35 but what actually happend was gold was just in huge physical demand and soared compared to oil as big oil couldn't get their hands on it. how close are we to having oil being only bought by gold to bring that ratio back down below 14 because it will rise ultimately way past 27 until gold gets revalued.

  15. Good commentary Mike. I bet the U.S. doesn't even have 2000mt anymore.

  16. Dave, the other day I was listening to a woman (who was presented to the listener as an expert on education- I forget her name) describe Obama's approach to public school education as doubling down on Bush's "No Child Left Behind." If I choose to be reductive about the nature of Obama and his abominable administration, that says it all.
    He has doubled down on The Shrub.

    In the meantime, I suggest everyone read post at the link below, as it speaks with eloquence, (a smidgen of) vitriol, and sophistication to Dave's following observation.

    "I hated Bush as much as anyone could hate Bush, but I hate Obama even more because Bush never led us to expect anything different than that which he delivered. Obama has turned into the biggest liar in the Oval Office that I've ever observed."

  17. Dave,

    love the site and your commentary at LM Cafe. A few burning questions if I may.

    1. Do you really think that gold's hammering in 2008 was b/c of 'deleveraging' as every main street presser said, or was it the BB smashing gold? They were able to label golds plunge with a simple and non-threatening label and no one I heard or read questioned the idea. I have difficulty believing it was just de-levering.

    2. As far as the juniors, the true thermometer of gold euphoria, and why they haven't done much. What is your take on naked short selling? With all the fraud out there, and ZERO enforcement, what makes anyone think we have a free market? Easiest way to cap rallies is sell shares you don'y have. Several examples have been cited of proxies in which more shares have been tendered than are suppossed to exist. Heck, do we as jr mining investors ALL hold valid shares (or should I say electronic entries)?

    Thanks again

  18. Hey Anonymous. Thanks for the feedback - I really appreciate it.

    Great questions.

    1) re: 2008 smashing of gold. We really had 3 big ones, March, July, Sept. March was right after gold had gone a bit parabolic, hit a new all-time high, and then I believe the cartel helped trigger a natural pullback, and made it more severe than otherwise, in order to start covering their enourmous futures short.

    Starting in July was when gold/silver fell off a cliff starting on a low volumn Sunday evening in the middle of the summer, in the middle of a statistically weak period for gold. Although all the commodities were crushed badly, silver was hit for like close to 50% over the next couple weeks and gold was hit for about 30%. I believe Henry Paulson engineered a huge hit on commodities, taking advantage of the fact that all the investment funds (not just hedge funds) had loaded up big on the long side and the banks took the other side of the trade. I do believe that sell-off had a lot do with hedge funds being forced via massive margin calls to delever, but that it was an attack on the metals/commodities designed for that purpose. When hedge funds were controlling as much of the trading as they were back then, it took a lot of the power to manipulate the markets away from the Fed/Govt (PPT) and the big banks. The Oct smashing was a product both the metals correlating with the big stock market sell-off, and more hedge fund delevering.

    So, yes, I believe that the metals smash in '08 was a by-product of the massive hedge fund delevering, but that it was much worse than it should have been because Govt/Fed/Bank manipulation.

    Where I think we saw a final bottom in Oct '08 was the fact that the metals/mining stocks never came close to a lower low in March '09 the way the Dow/SPX did. I think that was our first signal that gold was being used for flight-to-safety.

    As for naked shorting in the juniors (and the large caps), I know for a fact that it is much worse than anyone not on the inside (i.e. DTC, SEC, Fed, Treasury) could ever know about. I've seen actual trading data in ECU Silver, tracked over a long period time by one of the largest shareholders, to know for sure that naked shorting happens every day in these shares - especially the in the pink sheet/bulletin board market and up in Canada. This shareholder has filed several complaints with the regulators up there and they completely ignore his filings. It is a real problem and unfortunately one that won't go away until the system completely collapses and is rebuilt from scratch. That's why the truest of true goldbugs will, and have always, advised to only own physical gold/silvr that you keep in your possession.

    I still believe we have time before the final collapse, and I believe we'll see a huge run all stocks, especially mining stocks, from hyperinflation, and the key is to have the discipline to convert profits in the shares into gold/silver along the way. It's impossible to know if you have valid shares in your account unless you ask your brokerage firm for delivery of your certificates.

  19. Edwardo, thanks for the link. Interesting blog. I agree with most of what the author says, especially with respect to the Repubs/Dem in DC all being cut from the same cloth.

    HOWEVER, I truly believe the Framers of the Constitution originally set up the Constitution to avoid what our country has become today. Jefferson has many specific writings that warn against fiat money and allowing banks/financiers to gain control of the system.

    If you really study the timeline, it was, ironically, Lincoln who set off the slow and subtle disconnect in this country from gold standard. The "trickle down" dynamic that the author describes could NEVER take hold if we had a true, strict gold standard. It was the process of disconnecting gold from currency that allowed everything that blogger describes to happen in this country.

    I truly believe if the population of this country had been vigilant enough to prevent the banks from slowly taking control of everything, we would not be where we are. Of course, going all the way back to ancient Greece, philosophers have opined that the "masses" ultimately become too complacent to maintain true democracy. I believe that's what has happened over the last 140 years in this country.

  20. Dave, I'll look into Lincoln's contribution to the disconnect from the gold standard. However, I would say the that the first stirring against hard money began-though not overtly- with Secretary of The Treasury Alexander Hamilton who was the nation's first genuine imperialist.

    Having said that, the massive expansion of the nation's territory was, in my view, and among other reasons, always going to inevitably act as a kind of slow burn corrosive against the maintenance of a hard money backed currency. So, looked at in that light, Jefferson's Louisiana Purchase was ultimately an early step, however cloaked, toward the institution of fiat.

    But back to Hamilton, He, being an arch federalist and crypto imperialist-interesting that he and Jefferson hated one another- always pined for a central bank, and we almost got one fairly early on by way of Nicholas Biddle. Mercifully, Andrew Jackson, in one of his better turns as President, thwarted Biddle.

  21. Sounds like you read that latest biography that's out on Andrew Jackson. My father read it and, believe me, I got the blow-by-blow. He calls AJ "Ron Paul before Ron Paul existed" LOL.

    Here's the link re: Lincoln. The facts in this essay are definitive:

  22. Dave,

    "Of course, going all the way back to ancient Greece, philosophers have opined that the "masses" ultimately become too complacent to maintain true democracy."

    I believe the important distinction to make is the Greeks knew the masses would become too complacent to maintain a republic.

    Democracies are fairly easy to maintain as the lowest common denominator makes the rules. I like the old saying:

    "Democracy is 2 wolves and a sheep deciding on what's for dinner."

  23. The PPT is at it today. AU almost 2% down. Quadruple Witching Friday is right. Buckle up for last 45 mins of trading! Can't let that PM market make advances, GOD FORBID!

  24. @Anonymous - these are the kind of days in which you plug your nose, close your eyes and add to positions.

  25. @Bill Browne: great comment - totally agree. Your last sentence made me chuckle. I always appreciate good humor on a day like today. Thanks!

  26. I just added you to my blog list. Thanks.