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Central Banks Buy the Dips
Wednesday, July 05, 2006
An economist high in the Chinese government has advised purchasing gold bullion for their central bank on any upcoming weakness in the price, while a similar "buy the dip" strategy has been adopted by both their resource rich neighbors to the north and the oil-rich nation of the United Arab Emirates.
It seems that the world's exporters are becoming increasingly tired of accumulating paper money or its electronic equivalent in exchange for their hard work in manufacturing or their good fortune in sitting atop vast natural resources.
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According to the most recent statistics from the World Gold Council, China holds a mere 1.4 percent of its foreign reserves in gold while Russia holds slightly more on a percent basis, lagging in absolute terms. The UAE, however is nowhere to be found - not in the top twenty, not among the 110 nations that showed up on this list.
Apparently, even the tiny central African nation of Burundi which comes in last at #110 on the list with a grand total of 0.0 tonnes (after rounding) has a central bank that thinks more highly of the yellow metal than does the central bank of UAE., the world's #10 producer and #6 exporter of crude oil.
But China, with its near trillion dollars of foreign reserves, appears likely to have the most impact on gold demand in the years to come. According to this story, yet another prominent official is recommending that they stop stuffing their vaults with so much paper and get something more tangible.China should take advantage of any weakness in bullion prices to build up its official gold holdings as part of a strategy for diversifying its foreign exchange reserves, a senior government economist said Monday.
Over in the Middle East, in the wake of the failed Dubai ports deal, another central banker sees the benefits to reducing their exposure to the U.S. dollar. According to this report, they plan to go from zero to maybe ten percent.
Xia Bin, head of the financial research institute of the Development Research Center, a think tank under the Cabinet, also proposed that Beijing allow the yuan to fluctuate within a wider range against the dollar.
"It is practical for China to increase its holdings of gold by choosing an appropriate time to buy, because compared with other big trading countries the percentage of gold in China's reserves is seriously low," Xia said in an article on his agency's Web site.The UAE Central Bank Governor this week gave his strongest hint yet that the emirates will shortly enter the gold market and also purchase euros as a diversification of the national currency reserves presently held in US dollars. With the US dollar ripe for devaluation this seems a timely initiative.
Don't be surprised if the seasonal pattern for gold prices turns out to be permanently broken - it has been dominated by jewelry fabrication demand, that while still accounting for over half of all gold demand, is declining relative to investment demand.
The Governor of the UAE Central Bank, Sultan bin Nasser Al Suwaidi told reporters this week that the bank was preparing to convert up to 10 per cent of its currency reserves into gold, although he said that the bank currently held very little gold in its reserves.
'I don't think it is appropriate to buy gold now - it is too expensive. The appropriate time might come very soon. We could go up to 10 per cent,' he said.
Gold analysts predict a choppy market for the yellow metal over the summer months with a rally likely in the autumn. This is the pattern that gold trading has followed over the past five years, with the second half stronger than the first, although the $725 spike in gold prices this year almost broke this pattern before the recent sell-off.
With a strong rebound since the correction that started in May, there are more and more buyers taking the same view of a dip that looks more and more like it's not going to be dipping much longer.
Surely there will be other dips in the months ahead - they just may originate from higher levels.
This report by Ambrose Evans-Pritchard, former Economist writer and favorite of this blog, notes the recent spike in the gold price then turns to recent announcements by the Russian central bank of a similar "buy the dip" approach.The Russian central bank has a similar strategy of raising reserves to 10pc, buying the dips each time gold falls back from a speculative surge - a policy that quickly puts a floor under each correction.
To say that the metal has shown extraordinary resilience is really quite something since the "barbarous relic" really doesn't do anything more than just sit there. It is rather a matter of weakness or loss of confidence in paper money relative to gold that causes the price of gold measured in dollar terms to rise, for without such factors, gold would be irrelevant save for having something shiny to wear on wrists and necks.
Gold reached $730 an ounce in early May before crashing 24pc in the sharpest drop since the bull market began in 2001. The metal has since shown extraordinary resilience, regaining half the ground lost.
It is only with the recent questions raised about the durability of paper money, the amount of it created and the potential for so much more to be created to cure economic ills around the world, that central banks and pension funds have been purchasing the stuff.
Buy the dips.
29 comments:
Gold just sits there; that is precisely its value. It concentrates a tremendous amount of worth in a small volume, and unlike most consumable commodities, doesn't spoil. It has some nice physical properties, but more important is that it is incredibly rare.
You can put your entire fortune in a single safety deposit box in the form of gold (or bury it, if you're really paranoid). This is an amazing property.
Same goes for other PMs. Of course, one can only see any of this when one realizes that fiat currency is based solely on trust of some of the least trustworthy souls in society.
Argentina and South Korea are also said to be swapping their U.S. Dollars for the shiny stuff.
The funny part is that you guys really believe this stuff.
The only reason to buy gold is to buy in fear of a currency collapse. It has no positive aspects in and of itself. It does not curb global warming, cure cancer, power a car, fight terrorists, and is barely useful for building products. The only reason to buy gold is fear. I have yet to see an argument that says otherwise.
Rational people generally shouldn't invest based on emotions. For this principal reason, I have a hard time being convinced that gold is a good buy.
Additionally, it's too easy for the government to control gold prices or confiscate gold. There's a precedent for this, after all, and with a president who is keen to invoke powers well beyond those used in WWII, I'd be more than a little skittish about this eventuallity.
So it seems to me that gold is a risky investment with a huge potential downside. Aside from making gold traders/minters rich, what's the upside?
It's speculation in it's purest form, anony.
Those central bank and pension fund speculators are the worst of the lot -- either that or their just a'scared and are letting their emotions get the best of them. I've never heard such drivel about gold except from those who repeat over and over that gold earns no interest and pays no dividends.
Who needs either when it gains 20% a year against the dollar.
Gold has no value other than as a store of value in a world full of funny money and intractible long-term economic problems. We Americans have way too much faith in our currency and are spoiled by the priviledges it has provided as the world's reserver currency. Wake up people.
It [gold] has no positive aspects in and of itself. It does not curb global warming, cure cancer, power a car, fight terrorists, and is barely useful for building products.
Neither does paper money.
"Neither does paper money."
So...you pay for your purchases with what?
Gold and Economic Freedom
by Alan Greenspan
(1966)
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.
What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.
In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.
Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.
A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.
When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.
A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.
But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
Is gold back up to its 1979 price yet?
marinite has inadvertently made my point. Neither paper money nor gold have an intrinsic value. In an odd way, both are fiat currencies. The government can print more money, causing the USD to lose value, or it can confiscate gold, causing it to lose value.
The question is: which fiat currency do you want to use? The USD, backed by the sole superpower in the world? or gold, which would likely be confiscated by the sole superpower in the world?
Everyone seems to be under the impression that some mythical free market exists. Markets exist because rules of conduct have been set down by governments. According to Greenspan's article (posted above by john_law_ii), a gold standard could "protect savings from confiscation through inflation". Nothing prevents savings from actual confiscation of gold if the nations of the world decided to revert to a gold standard (see Executive Order 6102). If we were to go to a "land" standard, it could just as easily be confiscated (see New London, Connecticut).
Buy gold if you expect a post-apocolyptic world where the people with weapons have lots of gold. If they have sea shells, your gold won't be worth a USD (which you can wipe your butt with; gold isn't so absorbant).
But watching a new herd of lemmings make the same old blunder is so much fun.
anon 2:48 doesn't even know what the word fiat means
Exactly, lemming, he's clearly not as smart as us gold buggers, the dumbass. BTW, gold IS back up to its 1979 price, isn't it?
haha, the ingnorance surrounding gold is hysterical. see you at $1,000.
gold is not fiat.
gold is not useless. gold is probably why you can type on your computer and use your cell.
gold is more than just fear, it's about protection.
it is not speculation in it's purest form. if one knows the properties of real money, one sees how this is ludicrous.
(So...you pay for your purchases with what?)
paper money, as per Gresham's Law.
(Buy gold if you expect a post-apocolyptic world where the people with weapons have lots of gold. If they have sea shells, your gold won't be worth a USD (which you can wipe your butt with; gold isn't so absorbant).)
my gosh, don't you do research? there have been plenty of times where gold has been in a bull market, compared to equities, over the last few decades. I don't know why people just can't see the fact that gold is an investment like any other. why does every talk about buying gold have to come to someone saying "buy gold if you think the world is going to end." or, "buy gold and canned food and ammo." most of the people who say this aren't trying to make a point other than:
1. they don't know anything about gold
2. they are making fun
(BTW, gold IS back up to its 1979 price, isn't it?)
is the dow back to it's 2000 price? it'd have to go to near 24,000 to get back to it's dow/gold price.
Let me see if I understand the argument about government gold confiscation (Anon 1018am). So, since they are going to take my savings anyway, I'll just sit there obediently with my paper dollar and continue to take it up the ass. Truly righteous advice.
BTW, gold does earn interest if you lend it out.
To all the fiat freaks out there,
See you at the top. That's where you'll be buying gold from me.
amen to that.
Jim Sinclair (the man who made multi-millions in the 70's gold bull market) said that there won't be gold confiscation this time because those in power will have the gold and they won't want to give it up!
My gold stocks are up 70% from a year ago. How's that SP500 working for anyone?
http://finance.yahoo.com/q/bc?t=1y&s=%5EGSPC&l=on&z=m&q=l&c=%5Ehui
Greenspan is fascinating and I certainly can't figure him out, but it sounds like he never stopped believing in gold.
What Does Mr. Greenspan Really Think?
http://www.fame.org/PDF/MG_ISBN097103804X.pdf
Look where Dick Cheney is investing his money as he gets ready for an economic collapse:
http://tinyurl.co.uk/e0by
Gold is used on every vital contact point, in every computer on the planet.
It's great entertainment to watch this sort of dialogue evolve out all the way up. I just want to leave a thought with all the newcomers. There is nothing mystical about gold and silver. They are simply a time proven currency alternative. And in the present case, consider them a voice of dissent against big banks and big government. Given the degree to which the public coffers are being and have been raided, expect that voice to get very, very much louder. Confiscation schemes have been tried in the past as well. But, these are like trying to censor the internet.
Greenie hit it perfectly in 1966 when the US was still on the gold standard. My my, how the deficit has grown since.
"But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale."
Amazing.
Just how successful was Roosevelt in confiscating gold back in the thirties. I heard the government got about 30% of what it estimated to be "at large" turned in. I have no facts to back up this statement, however.
consider this, Enron at it's height was worth $68 billion dollars. if you invested your enron dividends in gold and silver(I don't even know if enron paid dividends) you'd have more money than you have now in stock. your gold and silver will never be worthless.
For those that are complacent with fiat currencies.
They are all created from debt. In every single case every single one of them has become worthless. They generally do not last long -- thirty to sixty years max.
Try counting the number of "past " fiat currencies alphabetically .. you might as well stop at the number 200 by the letter D.
Yep, sign me up for that ..
Oh, and central banks don't have a big whack of gold available .. they "leased " it out and now recent documents admit they only have 1/2 the gold they claim .. and those with the biggest amounts aren't selling / leasing any more.
Ditto : see ya at $1000 this winter !
When goverments debase their respective currencies, there is no alternative...Either move to hard assets (preferably portable) or lose what you have spent a lifetime dutifully working and saving. Why should a person just sit there and watch the fruits of one's labor be stolen quietly by inflation? Like rearranging deck chairs on the Titanic, maintaining the status quo does no good. One might as well move into metals, that you can hold privately, rather than leave it to moronic politicians and bureaucrats, who have virtually no clue as to how the financial system works. Most are lawyers and bean-counters who think "inside the box". Yeah, we'll just make another law!
These jokers are confiscating your savings right now! Do what is prudent today or face the consequences like the other 99% of the poor folks out there who continue to rely on paper money and promises from elected officials. Think for yourself!
Voltaire said that paper money eventually returns to its intrinsic value, zero.
In my view, the US is falling the path of former Roman Empire in so many ways one can hardly count.
What will happen when oil climbs to $ 100 - $ 150 per barrel and those who bought SUV's and a suburban home, especially with non-fixed loans, located 50 miles from work, faced with rising interest rates and inflation? Those defaulting on their overpriced homes will be bankrupt. Things will not be pretty.
It is best to prepare for the worst and hope for the best in this emerging scenario. Remember, two generations have passed that have not experienced a major financial crisis in this country.
This time, I fear the coming Greater Depression will be
far worse than the former since Americans do not save for a rainy day. Almost everyone is up to their heads in debt, no gold standard and an increasingly energy dependent economy that places the entire nation strategically at risk. When the implications of peak oil are finally realized by the public, and it becomes obvious that we cannot grow the economy anymore, due to global rising energy demands, the fiancial markets will tank due to uncertainty and lack of confidence. Debts will be go unpaid by government and individuals. In short the whole system is in jeopardy.
Perhaps the biggest threat will come not from economic collapse but from the lack of social cohesion and sense of community that was indeed present in the last depression. People helped each other. With the self-centered people of today, I wonder what would happen should the worst case scenario actually play out with food, energy and other essentail staples becoming scarce. Political instability will no doubt follow. What will the politicans do then? Make another law and smoke a cigar.
The question remains, will there be anyone that will care what they say then?
To those who worry about "gold confiscation"...
Wake up!
The Feds are confiscating your savings now! Within the last five years, the published national debt has climbed 50%. IMHO, privately held wealth that is quiet, (namely unregistered), untaxable, portable and not dependent upon anyone's promise to pay is perhaps the best way to retain wealth needed for future life needs.
Katrina demonstrated the ineptitude of "officials" to come to terms with a major disaster. What did we learn? You have to take responsibility for yourself.
Should the Feds want to confiscate gold again, use the Nancy Reagan axiom for illegal drugs..."Just say no!"
The Constitution supercedes any edict by those in power. One possibility to consider is should a serious financial disaster actually take place, there will be serious changes at all levels of government.
If the economy breaks down, who will care what those in Washington say. Collectively they will be rendered to the same value of the USD at that time, nearly zero.
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