Tuesday, November 17, 2009

Central Banks Have Become Net Buyers Of Gold

Following the huge purchase of gold by the central bank of India, the two decade long trend of central banks as net sellers of gold seems to have been reversed. There seems to be a growing unease surrounding the US dollar, although a dollar rebound could quickly put a halt to the bullish gold market. See the following post from The Mess That Greenspan Made.

A week removed from the blockbuster announcement that the Reserve Bank of India had purchased 200 tonnes of gold from the IMF, precious metals continued their ascent, gold making fresh all-time highs last week at just over $1,120 before ending the week with a gain of about $20 at $1,118 an ounce. Silver posted a modest gain, up from $17.39 an ounce to $17.42 an ounce.

The view that central banks will continue to be net buyers of gold rather than net sellers (as has been the case for about the last twenty years) has many calling the Indian purchase at $1,045 an ounce the "new floor" for the gold price.

That would certainly seem to make sense at least for the near-term as market analysts speculate on which central bank might be next to buy IMF gold while hearing the U.S. Federal Reserve and international G20 representatives stress that it is far too early to begin removing the massive liquidity and stimulus that have seemingly rescued the world from another Great Depression.

The recent rise in the gold price has obviously been aided by a weakening U.S. dollar but, with unemployment set to go even higher over the next six months, there is little reason to think that the Fed will do anything to bolster the currency during that time.

Rumors swirled last week that the Reserve Bank of India may have sold U.S. Treasuries to fund its recent gold purchase and there is growing unease amongst countries that maintain dollar "pegs" for their currencies as they have to print more of their own currency to buy dollars and maintain that peg.

As for silver, it is interesting to note that inventory at the iShares Silver Trust ETF (NYSEArca:SLV) continues to rise, surging in recent days to a new all-time high with the addition of 200+ tonnes as shown below.

Meanwhile, inventory at the world's most popular gold ETF, SPDR Gold Shares ETF (NYSEArca:GLD), remains below levels seen at mid-year.

It should be an interesting period ahead for both gold and silver since, going back to very early in the decade, there has been a repeating two-year pattern for the metals that can been seen in the gold chart below. Since 2002, prices have peaked at new highs early in the even numbered years - in 2004 at $425, in 2006 at $725, and, most recently, in 2008 at $1,035.

In many ways, recent events are shaping up to be a repeat of this pattern which, based on the previous peak-to-peak gains would imply a gold price somewhere north of $1,300 early next year.

Of course, any sharp rebound in the dollar (which some are still loudly predicting) would reverse this trend very quickly.

There were some truly odd goings on in Vietnam over the last week or so that, for those who pay attention to this sort of thing, really adds to the case for a much higher gold price, perhaps sooner rather than later. After seeing a surge in buying in gold bullion in recent years, particularly after inflation soared to nearly 20 percent in early-2008 and investors looked to preserve their wealth, the government banned imports of the metal.

Gold continues to be traded in the country, however, due to the limited supply, it has developed its own local market that, last week, saw bullion trading at about $60 higher than in global markets. After markets went "crazy" (see this account in Vietnam.net), the government announced that it would resume imports of the metal and premiums are now reverting quickly to more normal levels.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

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