When in doubt, follow the big money. And in the gold market the biggest money is controlled by central banks around the world.
As of October 2011, central banks around the world owned 30,717 tonnes of gold. Massive reserves coupled with the ability to direct current account surpluses mean that central banks frequently buy or sell tens of tonnes of gold each month. Although central banks usually conduct their gold transactions covertly, ex post reporting and hints of central bank activity can move the gold price.
When we decided to go off the Gold Standard many years ago it basically was due to the fact that the U.S. Dollar was the safe haven of all currency around the world. Now they look at us and since we now have the largest debt of 15 Trillion dollars in debt that is unsustainable the value of the dollar naturally comes down. Not rocket science. The biggest problem is the entire world is trying to devalue their currency which is a zero sum game. Gold at 1750 can be the next leg up I’m sure w ith extreme volatility on the way. Just follow the money. Central Banks are buying and. The Elephant in the room is China is opening their own Prrecious Metals Exchange in 2012 so they can buy in their own Currency. As long as there are low rates, massive debt around the globe and money printing it will keep up the price of GLD and SLV I think is the best buy of all precious metals. You can find some great miners as prices are sustained at these levels. Even if Gold went to 1500 these Miners are going to have explosive growth. You have to do your homework as all miners are not created equal.
Central bank gold purchases around the world often occur in tandem. Although monetary authorities usually claim independence, the reality is that central banks often collaborate to orchestrate the global monetary system. Usually, the monetary playbook can last years – even decades – so identifying central bank activity can provide investors with a perspective on the long-term trend. For example, throughout the 1990s central banks around the world were very much anti-gold, and this was reflected in central bank gold transactions throughout the decade. Concurrently, during the 1990s the gold price went nowhere and investors were best off staying away from the metal.
When those with the most firepower are fighting a battle, investors want to be on the winning side. During the 1990s when central banks shunned gold, the right trade was to stay away from gold. Today, central banks have been active buyers. The chart below shows the monthly change in gold reserves by central banks around the world. The data lags actual activity, since central banks often report gold purchases after they occur (sometimes years after). Nevertheless, sometime during the last decade there was a major shift in central bank attitudes towards gold, and central banks went from being net sellers to net purchasers.
According to Jonathan Spall, director of precious metals sales at Barclays Capital, “We’re going back to a time when gold is seen very much as money. It has been a complete reversal of the attitudes we saw during the 1990s.”
Combine the change in central bank attitudes with negative real interest rates, sovereign debt/deficit crises, currency debasement and political instability and the case for gold (GLD) (and other monetary metals such as silver (SLV), and platinum (PPLT)) remains intact.
Disclosure: Long gold, silver, platinum. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.
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