Central Banks Returning to the Gold Standard

Central Banks Returning to the Gold Standard

It appears the Central Banks are secretly returning to the gold standard, giving substance to the evident failure of President Nixon’s action in 1971 on the then Bretton Woods global financial exchange system.  Since the gold standard was removed massive printing of paper money and spiralling inflation, has resulted in the global financial situation we now find ourselves.

Perhaps the central banks have realised this, or it may be a case of shoring up the diluted liquidity of their massive currency reserves.

Starting in 2010 central bank gold purchases jumped to a then all time high of 455 metric tons.  The biggest buy gold by central banks since 1964.

This year they are looking at a further 493 tons and Thomson Reuters of GFMS recently commented that central banks will remain, ‘a significant gold buyer for some time to come.”

In a recent interview with William Patalon of EFT Daily News, Real Asset Returns Editor Peter Krauth explained he completely agrees with that assessment.  “You can see their thinking, Bill … you can see them saying: “We have enough of all these fiat currencies in our bank reserves – now we want something that’s going to counter those holdings, that’s a valuable asset and that has all the right fundamentals in place.’ And that asset is gold.”

Banks have raised the gold capital adequacy ratio* to Tier One so gold is now viewed as a core capital of equity and disclosed reserves. 

Originally it was Tier Three, with a 50% risk weighing. The Basel Committee for Bank Supervision (or BCBS) met some months ago and decided that gold should be made a Tier 1 asset for commercial banks with a 100 percent weighing instead of the existing Tier 3 with just 50 percent weighing. A monumental step in restoring a gold standard.

We are seeing the results of this in the gold market place with Turkey purchasing 6.8 tons in September, and Brazil buying gold again after four years.  1.7 tons in fact.  Other countries aggressively buying gold include: South Korea, The Philippines, Kazakhstan, Russia, Mexico, Turkey, Argentina and the Ukraine.

“All the fundamentals are in place for this to continue,” Continued Peter Krauth, “These guys tend to have a long time frame in mind. So when you see a shift like this, it’s a big deal. And the chances are that this could last for a very long time.”

According to a recent World Gold Council report, gold rose by over 11 percent and is up 16 percent on a yearly basis, outperforming almost all the worlds’ stock markets.

To illustrate the point here are the top twenty central banks gold holdings for 2012.

European Union                   10,787.4

USA                                       8,133.5     

Germany                                3,396.3     

IMF                                        2,814.0     

Italy                                        2,451.8     

France                                    2,435.4     

China                                     1,054.1     

Switzerland                           1,040.1     

Russia                                      936.7       

Japan                                       765.2       

Netherlands                             612.5       

India                                        557.7       

European Central Bank           502.1       

Taiwan                                     422.4       

Portugal                                   382.5       

Venezuela                                372.9       

Saudi Arabia                           322.9       

United Kingdom                   9100.3

Lebanon                                  286.8       

Spain                                       281.6       

Austria                                    280.0       

Although many are reticent about how much gold they are buying, many of these above have added or are supplementing their gold reserves. In particular China and India. Both of whom have added hundreds of tones of gold to their reserves over the past couple of years.

In fact some analysts believe there has been consistent gold buying over the past 2 years by many Asian countries. “The thing that’s caught people’s minds is the massive increase in Chinese buying,” remarked Ross Norman of Sharps Pixley, a London gold brokerage.

On this Peter Krauth stated, “Even if you look at this conservatively, it’s clear that we’re just at the start of this – meaning the central bankers are going to be buyers for an extended period. Even if this upturn in buying only lasts half of [the 22 year downturn], we’re talking 11 years – meaning we’re only two years into this.”

“Some investors look at the current price of gold, and view it as expensive because it’s more than doubled in the last few years alone,” Peter said, “But given what I see coming at us, I can say this with a high degree of confidence: Three or four years from now, we’re going to look back on this as a period when gold was still cheap, and where the profit potential was vast, because of where prices are going to go from here.”

With the central banks buying gold, albeit slowly and quietly so as not to cause the price to raise, should this be looked at as a enormous hedge against a potential collapse of paper currency?  The Central Banks seem to think so.  Raising the gold capital adequacy ratio to the first tier. Buying gold like it is going out of fashion. All the indicators are there. Central Banks are returning, quietly, to the gold standard.

Now is the time to buy gold, while the price is still low.

* Capital adequacy ratio is the ratio which decides the ability of a bank to meet its liabilities in the agreed upon time frame.

References:

http://buying-gold.goldprice.org/2012/06/gold-capital-adequacy-ratios.html

http://etfdailynews.com/2012/11/05/the-secret-return-to-the-gold-standard-gld-iau-sgol-slv/

http://www.forbes.com/sites/gordonchang/2012/01/29/why-are-the-chinese-buying-record-quantities-of-gold/

http://en.wikipedia.org/wiki/Gold_reserve

http://www.gold.org/government_affairs/gold_reserves/