Does Central-Bank Gold-Buying Signal the Top Is Near?

By Jeff Clark, Casey Research

Doug Casey told me in January, "The only thing that scares me is that central banks are buying a lot of gold; they're historically contrary indicators." When it comes to buying gold, central banks have such a poor timing record that they're frequently joked about as a contrary indicator.

We dislike referring to tonnes of gold instead of ounces. Gold is priced by the ounce. But certain market players, especially central banks, report gold transactions in tonnes. One metric ton (tonne) equals 32,150.7 troy ounces.

Recently, they have been buying, quite literally, tonnes of it. Consider the following:

  • Net central-bank purchases in 2011 exceeded 455 tonnes. This was only the second increase since 1988 (the first in 2010) and the largest since 1964.
  • Turkey has added over 123 tonnes since last October, buying 29.7 tonnes in April alone.
  • Mexico has purchased over 100 tonnes since February 2011.
  • The Philippines added 32 tonnes in March, its second-largest monthly purchase ever. Largely under the radar is the fact that it's buying some of its local production.
  • Russia continues buying, adding 15.5 tonnes in May. Its total reserves now stand at 911.3 tonnes, the highest level since 1993.
  • Thailand has raised its holdings by more than 80% since mid-2010.
  • South Korea has bought 40 tonnes since May 2009, an increase of 180%.
  • The World Gold Council (WGC) reported that central-bank purchases totaled 80.8 tonnes in Q1 2012, about 7% of global demand.
  • Over the past 12 months, net purchases have averaged almost 20% of total annual supply.

Here's the picture of what has transpired since the financial crisis hit in late 2008.

Central banks have added a net of 1,290 tonnes since the fourth quarter of 2008. This total excludes China and other nations that don't regularly report their activity, as well as countries that have been surreptitiously buying their own production.

That's a lot of gold buying. One has to wonder whether so much buying may in fact signal a top for gold. After all, a number of prominent analysts have claimed for some time that gold is in a bubble and that it's all downhill from here.

Not so fast. Like many mainstream reports, looking at the short-term picture usually leads to erroneous conclusions. Let's put central-bank purchases into historical perspective.

In spite of the recent activity, world central-bank holdings are far below what they were in 1980. Clearly, a few years of net buying does not a bubble make.

The difference is greater than you might realize. Consider that since 1980…

  • The global population has grown 55%
  • Worldwide gold supply has grown 120%
  • Foreign-exchange holdings have increased 650% since 1995, and now total $10.4 trillion.

It seems rather obvious that a lot more "catch-up" buying is needed before we start talking about a top for gold on this basis.

Meanwhile, we think the trend of central-bank gold buying will continue. It's not hard to see why: central bankers around the world know what it must ultimately mean to run the printing presses the way the US has since 2008, even if price inflation is not immediately obvious. It's no surprise that they want to hedge their bets, moving more reserves into something with actual value... something that can't be debased with a few keystrokes. The US dollar has been the world's reserve currency since WWII, and that's beginning to change – the movement into gold is just one facet of that change.

The entire world may indeed be beginning to understand that it's operating on a fiat currency system backed by nothing. At the same time, the sovereign debt crisis in the Eurozone is intensifying, and some countries have succeeded in inflating their currencies faster than the Fed has inflated the USD. It doesn't take Nostradamus to read this writing on the wall… and while the world's central bankers can lie to the public, they themselves know how bad things are.

In fact, the WGC is so confident that central banks will continue to buy gold that it's changed its reporting structure: it's added "official sector purchases" as a new element of gold demand, while eliminating "official sector sales" as a negative supply factor.

Of course, gold will someday top, and Doug Casey believes a bubble in gold and related equities is highly likely at some point, courtesy of the trillions more currency units governments will create in a desperate (and ultimately unsuccessful) attempt to stave off the Greater Depression.

But we're nowhere near that point. There's a long way to go before we start legitimately using the "B word" (bubble) or "S word" (sell).

In the meantime, I suggest using the "B word" (buy) or "A word" (accumulate) to make your decisions about gold.

This trend shift by central banks around the world is just one of several indicators that the global economy is increasingly politicized. For investors, this means that extra diligence and agility are needed, in order to avoid getting crushed by these changes.

The upcoming Casey Research/Sprott Inc. conference, Navigating the Politicized Economy, is designed to help investors learn about developing trends and take advantage of them not just to be protected, but to profit from the opportunities that will present themselves. With distinguished speakers including G. Edward Griffin (author of The Creature from Jekyll Island), David Walker (former US Comptroller General), and legendary resource speculator Rick Rule, you'll want to join us in beautiful Carlsbad, CA September 7-9. Register before July 31 and you'll receive $300 off.

14 thoughts on “Does Central-Bank Gold-Buying Signal the Top Is Near?

  1. I have no further comments except hoping you all read the following article. Pay attention on the movement of the swap dealers. The total debts are $15 trillion, divided by 300 million oz in Fort Knox = $50,000/oz, now $1589/oz, only 3.18% of targetted $50K. Even 1/10th glass is full, that works out about $5000/oz, right?

  2. I am a christian. Who is selectively quoting the bible and applying it to world markets as if the Lord is telling us about Markets. This is so pathetic and such a turn off.

  3. Good to know that we can eat paper dollars in the future. Or, even better, we can eat the electronic bits representing paper dollars. Yum, yum!

  4. It is however not a sin to watch out for the last days. These were the instructions Jesus said:

    42 Watch therefore: for ye know not what hour your Lord doth come.

    43 But know this, that if the goodman of the house had known in what watch the thief would come, he would have watched, and would not have suffered his house to be broken up.

    44 Therefore be ye also ready: for in such an hour as ye think not the Son of man cometh.

    Mathew 24: 42-44

    1. That is correct Paul. It is a sin to try and predict the timing. They be here at God's time. So for now just follow the triangles because they are not sinful. 🙂

  5. In 1983, in his book the case for gold, Ron Paul said. " With a gold standard the Fed would disappear. The banking industry would become an industry like any other, subject to the profit-and-loss test and given no guaranteed bailouts at taxpayer expense. The financial industry would be forced to surrender its love of socialism (for losses not gains) and become honest again. We would all start living within our means and thriving off private wealth rather than depending on the public sector to save us."

  6. the Bible also said those who truly obey the ways of the lord will be be saved from his wath???

  7. Don't just read Revalations study it! It is a sin to try and predict when the day of the Lord will be. Look up those versus. In the mean time how about the subject of trading. I see gold and silver as well as copper going down the tubes like it did with everything else in 2008. Check your charts. The only reason gold, silver and copper went up is because everything else went up starting in March of 2009. The big question in my mind is this the top of a large Bear Market Rally and is the market ready to tank. What is everyones thoughts?

  8. I feel what is going on worldwide is a extreme collapse of the whole system...Gold and silver are still a long term buy..If a major decline like 2009 happens copper is my bet as of last time around..people around me claimed me to be insane but I made a smal fortune....Happy Trading

  9. 3 Your gold and silver is cankered; and the rust of them shall be a witness against you, and shall eat your flesh as it were fire. Ye have heaped treasure together for the last days.

    4 Behold, the hire of the labourers who have reaped down your fields, which is of you kept back by fraud, crieth: and the cries of them which have reaped are entered into the ears of the Lord of sabbath. James, 5: 3-4

  10. "Neither their Silver nor Gold will be able to deliver them in the Day of The LORD'S Wrath. For the whole land shall be Devoured by the Fire of HIS Jealousy." Zephaniah 1:18

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