Are Central Bank Gold Reserves Vastly Understated?

There have certainly been a few things locally and globally that point to good times ahead for gold and silver.

The first was from that tried and tested source of financial news - my wife. She rarely if ever mentions precious metals unless they are wrapped around her fingers, wrists and neck in an ornate and beautiful fashion. But this time it was different. One of her wealthier associates had been talking to her financial adviser who was recommending she diversify some money out of property into gold and silver. If my wife never again said anything about precious metals investment, this would have been enough.

This told me two things. Firstly, the public is cottoning on to this gold-silver thing. In other words, we are approaching the endgame for this particular gold-silver bull phase. When gold and silver begins to be discussed by people who never mentioned it before, we are on the verge of a blow-off.

Secondly, she was recommended to lighten up on property. We have seen investment money first chase the stock market up to the year 2000. When that went sour, the hot money began to diversify into property until recently. Now that is going sour so where does the fiat money go? You don't need a PhD to see where a lot of money is going to flow towards in the months ahead. As the gold-silver bull gains speed, people who did not care for gold before and will not care afterwards will be jumping onto the "next big thing" and creating a positive feedback loop for a frenzy of momentum trading.

So far, so good. Meanwhile I read that various governments are not too keen on dollar refugees parking their cash in their currencies and forcing them up on the international exchanges. The formula is well known; a more expensive currency makes exports more expensive and hence distorts the trade balance.

As a result, various capital controls are in force or being devised rather than going for devaluation at this point (i.e. we like the value our currency is at, go and bother another currency). Well, that is bullish for gold and silver too because there is no Central Bank for gold and silver to deter investors. You can park your dollars in gold and silver without too many obstacles in your way.

On the subject of central banks, did you know that while selling gold to manage its price at sensitive times (i.e. not all the time) these guys may be buying it back on the quiet to reload their guns? At least that is the implication of a document cited by GATA from the Reserve Bank of Australia. The document is here (.pdf)).

I quote from two parts:

Foreign currency reserve assets and gold are held primarily to support intervention in the foreign exchange market.

That is the part GATA quotes. There is another ignored quote before it and my emphasis is in italics.

There is a range of operations that the RBA undertakes in the foreign exchange market on its own account. The most noticeable, though least frequent, outright transactions are those intended to influence the exchange rate – “intervention” in common parlance. In these cases, the RBA buys or sells the Australian dollar in exchange for US dollars, with a view to affecting not only the currency’s short-term price but also expectations about its likely course over the longer run. Such transactions are typically infrequent, but in fairly substantial amounts, and may be accompanied by statements making explicit the RBA’s views. Their impact on the domestic money market is fully offset, so that they have no impact on domestic monetary conditions.

The RBA also undertakes transactions to restore its reserve position after periods of intervention have occurred. Such transactions are typically consistent over a period of time, but in small amounts. While they probably, at the margin, have some impact on the exchange rate, they are undertaken in ways designed to minimise such effects. Their intention is to take advantage of a more favourable exchange rate to re-position the RBA’s portfolio.

This raises an interesting question for those who believe central bank gold reserves are vastly understated. If gold is treated like foreign currencies in a government's strategy when they sell it then why not when they buy back? If a government buys back foreign currencies in a quiet, piecemeal fashion in order to reload, then why not gold as well? If you accept the first quote then why reject the implication of the second? You cannot pick and choose your quotes.

That sounds like a valid question to me. Not that it matters, gold and silver are in bull markets whether central banks have the gold or not.

Comments

[Hugh]

The decades old idea that the sentiment of the man on the street in America has the ability to greatly move markets is dead. There are now billions of other people in other cultures that have disposable incomes. We have little insight into their minds. Any reference to the "psychology of the gold market" is therefore becoming more and more spurious.

Americans are only 5% of the world’s population. Get real.