Why Governments Buying Local Gold Output Is Bullish For Gold

Includes: DGP, GLD
by: David Urban

Bolivian President Evo Morales announced today that he has signed a law authorizing the central bank to begin buying gold from local producers to boost its international reserves.

Bolivia joins an increasing number of countries whose governments are taking the yellow metal off the market preferring to purchase and hold the metal internally rather than buy on world markets.

Venezuela last month in its nationalization of the gold mining industry included a similar amendment.

Bolivia and Venezuela join Kazakhstan, China, and Russia as countries who production from local producers.

Collectively, we are talking about approximately 550 tons or approximately 18% of overall global production.

The implications are greater than many realize. First, by purchasing all local production it stops the flow of gold into the world markets making it more difficult for ETF’s and other countries to accumulate large stakes.

In the future, Gold ETF’s (NYSEARCA:GLD), (NYSEARCA:DGP) and other sovereign nations may find it increasingly difficult to obtain bullion as the general public begins to pile into gold.

This sets the stage for a massive squeeze as gold demand continues to rise in countries like India.

Second, more and more gold moves into strong and out of speculative hands.

This may lead to a massive speculative spike and squeeze in the coming years as ETF’s and governments scramble to grab the remaining production. Therein lays the possibility that governments enter into agreements with mining companies to purchase a portion of their production.

One thing is for certain, despite the recent selloff the bull market in gold is far from over. Phase 3 is just beginning as governments seek to diversify their reserve exposure their reserves away from U.S. dollars and ensure supply.

Soon the general public will join the stampede into gold bullion and gold stocks as a protection against continued problems in Europe and the United States.

Disclosure: I am long DGP.