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A Popular Disaster Scenario for Gold... And Why I'm Not WorriedBy
Monday, September 19, 2011
There has been some talk that central banks and governments will dump their gold on the market... causing the gold price to drop.
Ron Paul, who I usually agree with, thinks that the gold in Fort Knox should be sold and the proceeds used to pay off or pay down the national debt. (At least, I think this is what he believes.) There have been similar proposals by certain Italian and French figures, since both those nations have large gold reserves.
Of course, anything is possible, but I think we saw very clearly what happened the most recent time official gold was sold...
A couple of years ago, the IMF announced they were selling 200 metric tons of gold. Immediately, the Central Bank of India stepped up and said they would be happy to buy the entire amount. India is newly rich, yet finds itself with far less gold than it should have, compared to its wealth. China is in much the same position, with some interesting exceptions...
First, China has become the globe's largest gold producer. Second, every single gram produced in the country is snapped up by the central bank. Third, we know they are also buying more gold on the open market, and I think Chinese official purchases alone explain why every dip in the price of gold has been short-lived. They are smart: accumulating gold by buying the dips. And yet, in comparison to its economic size, China still owns very little gold.
History explains a lot here, as it so often does. Italy and France and even Belgium own much more gold "per capita" than India or China because it was not too long ago, as history goes, that gold was considered money, by tradition as well as law. Those three European nations were part of a league that was the last to go off the gold standard in the 1930s.
On the other hand, British finance minister Gordon Brown, who later went on to become the prime minister, infamously sold a huge percentage of official UK gold stocks at the very low of the market in 2000: around $255 per ounce. You might think that the finance minister of a great nation would know enough to not sell valuables at the bottom of a bear market, but you'd be wrong.
So of course, some central banks and governments could sell gold, or even "dump" gold. But this doesn't worry me.
First, other central banks have made no secret they are accumulating gold. The Asian central banks in general have done everything but take out front-page adverts to announce they are now accumulating gold. Most recently, the central bank of South Korea revealed it was buying gold on the market.
This is a huge, if perhaps mostly symbolic piece of news: For decades, South Korea has been the lackey of American monetary policy. For it to take even some of its huge store of US dollar-denominated holdings and change them into gold is, to my way of thinking at least, rather earth-shaking.
So the central banks of newly rich nations, mostly in Asia, have shown themselves very willing to take huge blocks of gold if other governments want to sell. For India's central bank to buy 200 tons of gold in one transaction was hugely convenient and so very much easier than going into the market and doing it piecemeal.
Second, even if no other central banks step up and want to buy official sales, wealthy individuals all over the globe would be happy to do so. There are now enough of these people, from Moscow, Russia to Moscow, Idaho, to negate any effect of mass central bank selling.
Third, I truly think the tide has turned. Central banks have become net accumulators of gold and I don't think this trend will change. They know more than anyone else how very easy it is to push a computer key and buy bonds of bankrupt nations like Greece or Ireland with "money" that they have created from nothing.
In this moment of extreme uncertainty about the future, it is foolish to expect central banks to sell their family jewels.
So to conclude, yes, it is possible that some governments could sell their gold. But other governments would be buying. Indeed, they already are buying. And their numbers are growing all the time.
Good investing,
Chris Weber
Further Reading:
From Chris Weber… In 1965, French president Charles de Gaulle explained in just a few words why gold was important. In less than two minutes, he nails it completely. And he predicts the current monetary and currency crisis.
The world could use such statesmen of similar vision today. You can watch him here.
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