By: John Browne
Senior Market Strategist, Euro Pacific Capital, Inc.
-- Posted Tuesday, 4 December 2012 | | Source: GoldSeek.com
Gold
appears to be headed for an impressive price appreciation for the
second half of 2012. Since the beginning of July, gold is up almost
10 over the same time frame. What is noteworthy here is that in recent
months, fears of a worldwide recession have increased markedly. It used
to be considered axiomatic that recession created adverse conditions for
commodities (a reality that has helped push down the price of crude oil
thus far in 2012). How then can we understand the movement in gold?
Reports
have recently been released that throw particular light on the degree
to which central banks around the world are accumulating gold. These
activities must be playing a significant role in keeping the heat turned
up when it may be otherwise cooling down. Given the extraordinary
degree of insight that central bankers are expected to have, what do
they see that drives them to buy gold when classically the metal should
be falling in times of recession?
As
we have said many times, there are two fundamental investment reasons
to buy gold. The first is as a hedge against the loss of purchasing
power of fiat currency, caused either by inflation or currency
debasement. The second is as insurance against political and financial
uncertainty or collapse. Central bankers are not giving either scenario
much lip service.
By
the latest analysis, it appears that the European Union (EU) is headed
toward depression. After twelve years of stagnation, the Japanese
economy remains flat at best. With an Obama victory at the polls,
Obamacare, and massive tax increases threatened, the U.S. economy looks
set increasingly for recession. If recession hits the world's two
largest economies, the EU and U.S., the international economy, including
that of China and its prime raw material suppliers such as Australia,
Brazil and Canada, can't be expected to grow robustly. Runaway
inflation, according to the models to which most central bankers
subscribe, would then be considered a distant risk. Is it possible that
these individuals, at the apex of the economic and financial worlds,
don't trust their own policy papers?
Perhaps
they understand the net effect of massive quantitative easing and the
distortions being made by the ultra-low interest rates that have been
held far too low for far too long. The unconventional monetary policies
unleashed on the world since the beginning of the Great Recession have
upended the financial rule book. But don't expect central bankers to
openly acknowledge this change. Instead, they will talk loudly about the
threats of deflation while quietly expanding gold reserves.
At
present, these loose monetary policies are actively debasing currencies
like the U.S. dollar and euro. In order to protect their exports into
those economies, other hard-currency countries have engaged in
competitive currency devaluation. Examples would include Switzerland,
Japan and China.
Even
in the absence of high inflation, currency debasement has contributed
to a higher gold price. This, in turn has encouraged some central banks
to increase the proportion of the gold content and decrease the amount
of fiat currency in their reserves. This is somewhat surprising given
that many countries had agreed to sell gold under the Central Bank Gold
Agreements (CBGA's) I and II.
Russia,
Ukraine, India, Turkey and the Kyrgz Republic have all increased their
gold holdings recently. Turkey has even gone so far as to demand an
increase in the proportion of gold held by its commercial banks as part
of their reserves. Perhaps most important of all, James Rickards, a CIA
and Pentagon senior advisor, released data recently showing that, in
2009, China secretly possessed gold holdings of 1,054 tonnes, or some
450 tonnes more than previously disclosed. This places China as the
seventh largest holder of gold, or some 14 tonnes ahead of Switzerland.
Perhaps this explains the recent news that gold is now the #1 Australian
export to China, passing coal this year.
China's
gold holdings amount to a relatively small 1.8 percent of her foreign
currency reserves. This is far behind the largest holders. The U.S. has
8,133.5 tonnes, or 78.3 percent of its reserves; Germany has 3,412.6
tonnes, or 69.3 percent, the IMF 3,217 tonnes; and even Italy, in fourth
place, has 2,451.8 tonnes or 66.5 percent.
Clearly,
China has a long way to go before challenging the United States' vast
holdings. However, China appears to be set upon a course of serious gold
accumulation. Now the world's largest gold producer, China retains all
its domestic production and buys additional tonnage on the international
market.
The
crucial message that many central banks are buying gold has not been
lost on the private sector. The Exchange Traded Fund (ETF) SPDR has some
1,120.6 tonnes, making it the world's sixth largest holder and excludes
other privately held accumulations.
Central
banks are at the epicenter of the apparently coordinated unconventional
monetary policies of quantitative easing and distorted low interest
rates. The fact that many of them are buying gold surely carries a
generally bullish message for the yellow metal, despite the increasing
signs of worldwide recession or even of depression.
John
Browne is a Senior Economic Consultant to Euro Pacific Capital.
Opinions expressed are those of the writer, and may or may not reflect
those held by Euro Pacific Capital, or its CEO, Peter Schiff.
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