As Investors Flee Gold ETFs, Central Banks Jump in as Bigger Gold Buyers
Monday, March 11th, 2013
By Michael Lombardi, MBA for Profit Confidential
While mainstream financial and a growing number of economic forecasters focus on investors fleeing the gold bullion market, I am following in the footsteps of central banks around the world…
Investors pulled out a record amount of money from gold bullion-backed exchange-traded funds (ETFs) this past February. A total of $4.1 billion was withdrawn from gold bullion ETFs last month, the largest single-month outflow since January of 2011. (Source: ETF Trends, March 6, 2013.)
Gold investors fled the market on speculation that gold bullion prices will plummet, as the metal’s future looks anything but bright—the theory being the global economy is improving and central banks will need to pull back on their easy monetary policies.
But, as investors sold ETFs in February, central banks around the world added to their gold bullion reserves.
South Korea added another 20 metric tons of gold bullion to its holdings in February—raising its gold reserves by 24% to 104.4 tons. Since June of 2011, South Korea has purchased gold bullion five times. (Source: Bloomberg, March 6, 2013.)
Similarly, central banks from Russia and Kazakhstan have been increasing their gold bullion holdings as the prices go down. According to the International Monetary Fund (IMF), the Russian central bank purchased 12.2 tons of gold bullion in January.
As the World Gold Council cites, central banks across the world ramped up their gold bullion buying; they bought 534.6 tons last year, 17% more than the previous year.
Dear reader, when you have the former biggest sellers of gold bullion, central banks, turning into buyers, it is nothing less than a bullish indicator.
What holds true is that central banks need gold bullion because countries around the world are in an outright war to lower currency values and thus central bank reserves are in danger.
I will turn bearish on gold bullion the day I find central banks have both turned to net sellers and stopped printing paper money out of thin air. Until then, I see the current correction in gold bullion prices as a great opportunity for investors.
The chart below is the S&P Case-Shiller 20-City Home Price Index.
Chart courtesy of www.StockCharts.com
From the S&P Case-Shiller 20-City Home Price Index, we can see that home prices are still down almost 30% from their peak in early 2007.
As the chart shows, a little change in home prices doesn’t really mean recovery in the housing market. On average, home prices in the U.S. economy will have to go up about 42% for the people presently living with negative equity in their homes to break even. This much of a recovery could be far away for the U.S. housing market…
According to RealtyTrac, foreclosures in the U.S. housing market dropped seven percent to 150,864 in January from the previous month. One in every 869 homes in the U.S. housing market was on the verge of foreclosure in January. (Source: RealtyTrac, February 12, 2013.)
And, according to real estate research firm CoreLogic, in October of 2012, foreclosures accounted for 11.5% of total home sales. In the same period of 2011, they accounted for 17.3%. But in the same period when foreclosures declined, short sales climbed from 10.4% to 8.4% of all sales. (Source: Wall Street Journal, March 5, 2013.)
Short sales, where a homeowner sells his/her home for less than the mortgage and the bank takes the loss, have taken up the slack in foreclosures! Add to this the fact that first-time home buyers are not present in the U.S. housing market rebound while institutional investors are buying single-family homes in bulk and renting them, and all of a sudden the U.S. housing market rebound is questionable.
There is no doubt the U.S. housing market is one of the places that can drive the U.S. economy towards economic growth. When Americans buy homes, they spend money to get things needed to run the household; consumer spending increases, businesses sell more, and so on and so forth.
As long as the housing market stays distressed, you can forget about economic growth. There is no doubt prices in the U.S. housing market have increased since 2012, but looking at the bigger picture, I’m skeptical. If the U.S. housing market is any indicator of economic growth, I am certainly not betting that the U.S. economy will do any better.
Where the Market Stands; Where It’s Headed:
I may be the only bear left standing, but that doesn’t bother me.
We have a stock market that has risen simply from an expanding money supply (money printing and artificially low interest rates). Corporate insiders are selling, corporate earnings growth has turned negative, stock advisors are far too bullish, the economy is slowing—all the indicators of a market top.
What He Said:
“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in Profit Confidential, December 4, 2007. This devastation started happening the first quarter of 2008.
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