6/12/2012 12:11:11 AM | Diane Alter, Money Morning
96 Reads | 1 Comments
When Federal Reserve Chairman Ben Bernanke failed to hint at more monetary stimulus last week, gold prices took a small hit.
But the picture for gold investors just brightened again thanks to increased activity from central banks.
Central banks are buying the yellow metal in copious amounts, marking
the first time since 1965 that bankers have been such steady buyers.
Central banks amplified their gold stores by 400 metric tons, the
equivalent of almost 2,205 pounds, in the 12 months through March 31.
That was an increase from 156 tons in the same period a year ago,
according to data from the World Gold Council.
Barron's reported Saturday that the World
Gold Council "is now confident that central banks will continue to buy
gold and has added official sector purchases as a new element of gold
demand," according to a report from London-based bullion dealer Sharps
Pixley.
The fresh facts indicate that central bank purchasing will continue for the foreseeable future.
That is quite a turnaround from the heavy selling the banks made from
1966 through 2007. During that time central bankers engaged in
substantial selling, with only short periods of meager buying.
Emerging markets lead gold purchases
The bulk of the buying has come from Asian and emerging market
central banks, which typically hold a lesser share of their currency
reserves in bullion than developed economies.
Kazakhstan's central bank announced it will increase the share of
gold in its foreign exchange reserves from about 12% to 15%. The
country is bulking up on gold while slashing its holdings in the
besieged euro by one-sixth.
"World practice shows that holding up to 15% [of gold] is what should
be done, depending on the performance of the dollar and the euro,"
Kazakhstan's central bank deputy chairman Bisengali Tadhiyakov told
reporters.
Former Soviet republic Kazakhstan joins Russia, Mexico, Colombia and
South Korea as the countries that have bumped up their official gold
reserves in recent years.
Following the end of World War II, central banks stockpiled gold, as
it was fundamental to the global financial system as set out in the
Bretton Woods agreement of 1944.
But when President Richard Nixon took the United States off the gold standard in 1971 (the
"Nixon Shock"), it undermined the Bretton Woods system. Banks no
longer required so much bullion, and the selling began.
Central banks again took a shine to the yellow metal at the height of
the 2008 financial crisis. As the U.S. Federal Reserve attempted to
stimulate the economy by printing money, central banks in emerging
economies looked for ways to diversify from devalued dollars and other
fiat currencies, and began acquiring gold.
Jeff Christian, founder of New York-based commodities consulting firm CPM Group, told Barron's that
central banks "will probably be continuous buyers of small volumes of
gold for the foreseeable future," accounting for roughly 10% of the
gold supply.
Christian noted that central bankers will avoid buying any quantity
that dramatically affects the price of gold. Yet steady buying of 10%
of annual supply is certain to help buoy gold prices.
Gold price volatility
The long-term gold prices outlook is bullish, but price volatility remains.
Gold speculators looking to swiftly trade in and out of the yellow
metal have exited. Open interest of managed futures funds, considered a
good gauge for all opportunists, has slumped an astounding 28% since
the beginning of September, Barron's reported.
I think we'll see more volatility in gold because of the absence of
speculators," George Gero, a precious-metals strategist at RBC Capital
Markets, told Dow Jones newswires. Speculators often diminish volatility since they add liquidity to markets.
Expect major moves in gold over very short periods, said Gero. The
rollercoaster ride in the metal will be too nauseating for short-range
speculators to bear.
The new gold environment will be best suited to investors interested
in the long haul -- the patient gold bug bunch who buy and hold for
years.
Gold prices edged up 0.2% Friday to close at $1,590.10 a troy ounce.
