|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.
Central Bank 502.1
Saudi Arabia 322.9
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.