Central Banks Pile into Gold on Price Drop

gold bullionI’ve been writing about China’s desire to own more gold bullion in order to back its currency, the yuan.

Naturally, if you were China and you wanted to buy gold bullion, you wouldn’t advertise it to the world or the gold bullion price would rise in anticipation of the purchases. The People’s Bank of China would perform the operation quietly.

The Bank of International Settlements (BIS) is an institution created by the central banks around the world. The BIS essentially is a bank for all of the world’s central banks. Its aim is to foster financial and monetary stability globally.

When Ben Bernanke spoke on February 29,2012, inferring that a third round of quantitative easing (QE3) was not likely, the price of gold bullion dropped over $100.00 an ounce that day. On that particular day of trading, over 1.4 times what central banks bought all of last year in gold bullion was traded!

Actually, physical gold bullion was not traded. It was mostly paper contracts. There are really two markets in gold bullion. The paper contracts that trade gold on exchanges and the investors who buy and take delivery of physical gold bullion.

It has been confirmed that, when the price dropped on February 29, the BIS stepped in and bought four to six tons of actual gold bullion worth roughly $250-$300 million. It’s certain that this purchase was made on behalf of a central bank, where physical gold bullion was delivered; however, we don’t know the identity of that central bank.

An educated guess would be the People’s Bank of China, but many of the emerging economies’ central banks are looking to buy gold, such as Brazil, Korea, India and Thailand, so it could have been any one of them.

I’ve been watching markets for decades and I can say that, even though it is not reported, my suspicion is that there was a lot more central banks buying physical gold bullion on that day, especially the People’s Bank of China.

Again, I don’t think the People’s Bank of China will advertise that it wants gold bullion for fear of driving the price higher. The other thing the People’s Bank of China cannot do is to just buy gold bullion, because the sheer volume of its purchases would move the market higher.

But on a day when trading volume just explodes—with volume that hasn’t been seen in years—you take the opportunity to buy actual physical gold bullion, because, among all that volume, no one will notice.

Yes, the price of gold bullion was taken lower on February 29. Whether the price of gold bullion will trade lower before it resumes its bull run is impossible to know. However, if you’d like to sell your gold bullion, dear reader, the People’s Bank of China and other central banks around the world would love to take the physical gold bullion off your hands, especially at this bargain price.

Michael’s Personal Notes:

The U.S. is first…in taxes.

The U.S.is perceived as the country that is home to the most competitive companies in the world with the largest corporate profits.

This perception rests on the assumption that the U.S. creates the best foundation to foster companies and so produce tremendous growth and corporate profits.

In the last few decades, other countries have created better education systems and have reduced tax rates and instituted tax cuts in order to imitate the U.S. and to foster the growth of companies that can compete and outdo American companies.

Well, as of this coming April, Japan is going to cut its corporate tax rate to 36.8%, leaving the U.S.—after factoring in federal and state taxes—at 39.2%; the highest level of corporate taxes in the world. This is 10%-15% above the world’s average!

Of course, having the world’s highest tax rates doesn’t inspire corporations to want to remain here or return here from overseas, as it affects corporate profits.

The other major issue that has been a hot political topic is those American corporations that have corporate profits overseas, but that don’t return those corporate profits to American shores, because they would be taxed immediately—at the highest corporate tax rates in the world.

The fact of those corporate profits remaining overseas means that jobs and investments occur in those countries at the expense of the U.S.

Republicans, in 2012’s election campaign, are aiming for tax cuts on those overseas corporate profits, in a bid to get that money invested back here in the U.S. The Republicans are aiming to lower the corporate tax rate to 25% from 35%, which would move the U.S. back down on the list of the highest corporate taxes in the world, but it would mean that the country still has high, above-average corporate tax rates.

Of course, the Democrats will have their own response to this tax cut on corporate profits. Everyone will make tax cut promises concerning those corporate profits, but will anything actually be done about it in the end?

There is no question that America’s competitiveness and corporate profits are hurt by having high corporate tax rates. The rest of the world has left us behind after imitating us.

There have been numerous economic studies done that illustrate how countries with high corporate taxes tend to have lower wages for their citizens. Clearly, this is not helping the nonexistent income growth in this country.

How these tax cuts shape up come November’s Presidential election is anyone’s guess. However, if tax cuts are instituted in a bid to shore up corporate profits, this is going to lower government tax revenues, which means that the budget deficit will pass that trillion mark I’m looking for in 2013.

Like a household, the consequences and lack of flexibility of high debt loads and large budget deficits cause are daunting. Got gold?

Where the Market Stands; Where it’s Headed:

The bear market rally that started in March of 2009 has brought the Dow Jones Industrial Average to over 13,000 from 6,440 on March 9, 2009—quite a feat. Personally, I do not believe the rally is over yet. I believe stock prices have more room on the upside before Phase III of the bear market starts.

Yes, there are many reasons why the stock market should come down, but two major reasons why it still has upside potential. Interest rates are still historically low and equities provide a good alternative as an investment vehicle (but inflation is rising fast, so higher interest rates could come sooner rather than later). Secondly, investor and stock adviser confidence is not bullish enough, something that can also change quickly.

What He Said:

“If the U.S.housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure—these are the bank stocks I wouldn’t own.” Michael Lombardi in PROFIT CONFIDENTIAL, May 2, 2007. From May 2007 to November 2008 the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.