European central banks have cut their sales of gold to the lowest level in almost a decade, reversing the practice of recent years when hefty sales helped depress prices. Institutions bound by the Central Bank Gold Agreement – the banks of the eurozone plus Sweden and Switzerland – sold about 343 tonnes of gold in the year that expired on Friday, the lowest amount since the first CBGA was signed in 1999. This compares with 475.8 tonnes in the year to the end of September 2007. Under the agreement, the banks are allowed to sell up to 500 tonnes of gold each year. As central banks sell less, investors are rushing into bullion-backed exchange traded funds to such an extent that some analysts refer to the ETFs as the "people's central bank" because they are now bigger than most countries' official reserves. Bullion ETF holdings reached a record 1,056.7 tonnes – or more than $30bn – on Friday, up 33 per cent in the past 12 months and double the 2006 level. The developments provide a bullish backdrop to the annual meeting of the London Bullion Market Association, which begins Monday in Kyoto. "Less central bank selling sends a strong bullish signal to the market," said Philip Klapwijk, GFMS chairman. – Financial Times
Dominant Social Theme: Central banks are prudent.
Free-Market Analysis: Not really. It may be a bit of a mystery why central banks have ceased to sell gold. Or it may simply be a comment on the "smarts" of central bankers. Let's see, they sold gold all the way up, didn't they? They sold it when it was US$300 and $US$400 and US$500. Now that it is about US$900, they have ceased to sell. Good for them!
It has long been our contention that the world remains on a de facto gold and silver standard, even if many of the people in it don't understand the reality of the money they use. This money is supposedly guaranteed by the "full faith and credit" of the state. But in fact, states are not entirely stable entities, certainly not so stable as money metals – gold and silver. When fiat-money systems begin to shake, as they are shaking now, the ownership of gold and silver becomes less of a temptation to manipulate and more of a valuable commodity.
Banks, even central banks are made up of people, too. When fiat-money looks strong, then there is a temptation to sell gold and silver, perhaps to "cash out," but more likely to continue to suppress the price of honest money. When times are tough, central bankers, like everybody else, tend to cling to their gold – even if they are anti-gold.
It's not so complicated. Human nature is what it is. There have been literally billions of words spilled across major international newspapers and magazines decrying gold and silver, repeating socialist economist John Maynard Keynes' canard about gold being "a barbarous relic." And we've mentioned before, during the "Asian contagion" of the late 1990s, how European banks apparently demanded to be repaid in gold. Korean officials went door to door demanding gold and silver jewelry from citizens. And Koreans handed over their bangles and necklaces and rings. They understood what they were asked, and the reasons why.
Gold is ever thus. Silver is silver. These money metals cost a great deal to get out of the ground, and are therefore worth a great deal. Simple. They are a store of wealth and value. How valuable is a Federal Reserve note? How much effort goes into the push of a button to create credit. About as much as the credit is worth.
Of course, even in granting gold and silver a place, the articles still mislead. What else, perhaps, should we expect from the Financial Times. ETFs are not the people's bank – nothing of the sort. It pleases the Financial Times, perhaps, that savers should turn from one paper product – central banking notes – to another, the paper issued by institutional holders of gold and silver. But notice who has possession of the honest money itself. Hint: it's not the buyers and sellers of ETFs. No, it is the fund and its managers. And to be frank, there are more than a few questions about how much gold and silver these ETFs hold, and where, and when.
We think central bankers have gotten nervous. Yes, it may be as simple as that – unless we hear of another, more compelling reason. But with banks refusing to lend to banks, and banks, perhaps even central banks, being suspicious of the quality of holdings of other banks, gold and silver are likely to be looked upon as reliable a resource as one could possibly possess.
What's the moral of this story? Hold gold and silver. And please note, the central banks are holding the real thing. Yes, now that the price is high enough, central bankers have become holders, and perhaps even buyers.
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