Tuesday, August 25, 2009

Central Banks Hoard Gold

"European central banks party to the Central Bank Gold Agreement have signed a five-year deal that will cut the annual sales limit to 400 metric tons of gold and allow the International Monetary Fund to join as a signatory it it wishes. ... Analysts said the lower ceiling on gold sales was a belated recognition that central banks have become less willing to sell reserves, reflecting a change in thinking at central banks at a time when the dollar is in decline and inflation worries are widespread. ... The latest deal provides certainty to the market that none of the European central banks will flood the market to take advantage of high prices. The gold holdings of the 10 largest signatories total more than 11,000 tons, valued at $350 billion. ... However, the lower ceiling is an encouraging development for gold prices, as it suggests gold is regaining its former status as a monetary asset. 'Many central banks are reviewing their position on gold,' [Eugene Weinberg at Commerzbank] said. 'Gold has been over the last years probably the most stable currency'," my emphasis, Nina Koeppen and Matthew Walls at the WSJ, 10 August 2009, link: http://online.wsj.com/article/SB124963253160313925.html.

Less "willing to sell reserves"? Does that mean central bankers think gold is going up "in value"? "Flood the market"? Hahahahahaha, would the Mogambo Guru say. Nice cover story, I say. Sell gold to buy what? Dollar bonds? "Regaining its former stature"? What would Charles DeGaulle say to this? Gold is $956 as I write, 46.25X its 1933 $20.67 "price". Or is the dollar .00104 ounces of gold, down 97.9% from .04838 ounces in 1933? Got gold? get more? Even the central banks aren't selling. Suppose they sold 400 tonnes a year, how much is that? At 32,151 troy ounces per tonne, that's 12,860,400 ounces, or $12.3 billion a year. Not a lot. That all GSG got in its recent AIG bailout. "Most stable currency" indeed. So it has been for 5,000 years.

10 comments:

Anonymous said...

Money is a confidence game eh?

After watching Secretary Geithner blather on in his WSJ/Digg interview it's a lot easier to have confidence in a chunk of metal than his actions. He's barely a smooth apologist.

Independent Accountant said...

Anonymous:
Precisely. Read my 4 January 2009 post, "Jim Grant on the Fed".

Tim in Sugar Hill said...

I agree with your conclusion that this is an encouraging development for gold prices. But I have a few questions:

1. What was the annual sales limit before this agreement was signed?

2. Do European central banks lease gold, as the Fed does, in order to flood the market to keep prices down? And even if they do not, what will prevent the Fed from keeping the price of Gold artificially low by leasing more and more Gold?

Cool blog. Just got here via a link from Jesse's Cafe Americain.

Tim

Anonymous said...

Here's the quick link to IA's Jan 4th entry "Jim Grant on the Fed" he notes above.
http://skepticaltexascpa.blogspot.com/2009/01/jim-grant-on-fed.html
Personally, I don't see much downside to gold these days. If treasury continues printing gobs of cash, gold retains its real value in the face of reduced dollar purchasing power. Ditto if the fed can't sop up excess liquidity once the recovery is agreed to be underway and inflation fears are relaized.
In a rleated vein, there's been some talk on the blogosphere (seekingalpha.com has several articles) that central banks have 'loaned' out gobs of gold already in a way that the same ounces are accounted for in multiple venues like ETFs, funds, banks, etc. If true and if that house of cards falls (doubtful at least to the latter), gold will skyrocket as the true supply would be recognized as being a fraction fo what is actually accounted on the open market. All the contrary indicators I see are very short term, so IMHO being long gold is the much less risky position.

Independent Accountant said...

Tim:
1. 500 metric tons a year.
2. Yes, but I do not consider gold leasing to have any significant effect on gold's "price".

Thanks. I really like Jesse and agree with about 90% of what he writes.

Tim in Sugar Hill said...

Wow! The ceiling on selling gold dropped 20 percent. That is significant.

How has the price of gold been kept so low for the last 30 years? Not that I'm complaining. At these prices I can still afford to buy a little more.

Tim

Independent Accountant said...

Tim:
I don't think it significant at all. 100 tonnes a year is 3,215,100 ounces or $3.048 billion at $948 per ounce. Peanuts. I do not know why gold is now $948. Consider, with M2, according to the St. Louis Fed at $8,318 billion and the Fed holding 261.5 million ounces, that's $31,809 per ounce for a 100% "gold-cover" ratio. Why isn't gold $31,809 now? I do not know. I only expect gold to go up over the long term.

Tim in Sugar Hill said...

I agree with you. But how long is long-term? My Birth Certificate likely expires in 30 years or so. ;)

Tim

Saoirse said...

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Patricia

http://forextradin-g.net

Independent Accountant said...

Patricia:

Thanks.