Nowadays, it seems gold has become the commodity the mainstream loves to hate. The headlines have changed for the yellow metal. The gurus are rating gold as “overvalued,” outright holding bearish views on it.
But there are important fundamental reasons behind the multi-year move in the gold prices that are not being recognized. I’ve harped on this in these pages for long time; I believe gold prices will move higher thanks to central banks around the world keeping their printing presses running overtime.
The fundamentals of gold’s demand have shifted. Central banks used to be net sellers of gold. Now, when they are faced with the devaluation of the U.S. dollar and their own currencies, and fluctuating reserves, they are running back to gold, as there are not many options for them left to back their currencies.
In November, the central bank of South Korea increased its gold reserve by 20%. It bought 14 metric tons of the yellow metal for $780 million. The purchase brought the central bank’s total gold holdings to $3.76 billion, or 1.2% of its entire reserves. (Source: Bloomberg, December 4, 2012.) South Korea’s central bank also purchased 16 tons of gold in July of this year, and purchased another 15 tons in November of 2011.
Note that South Korea is not the only central bank increasing its gold reserves; other central banks are doing the same. To name a few; Kazakhstan, Russia, and Turkey’s central banks have added gold bullion to their reserves. Especially Brazil’s central bank; its gold holdings just increased to an 11-year high. According to the World Gold Council, central banks around the world bought 373.9 tons of gold in the first nine months of 2012!
But that’s not all, the European central banks, which had previously signed an agreement to sell 400 tons of gold per year, are holding back and not selling. In September 2011, the banks, which signed an agreement called the Central Bank Gold Agreement (CBGA), sold only 7.1 tons of the allowable 400 tons. In 2010, they sold a total of 53.3 tons of gold. (Source: World Gold Council, September 2011.)
Dear reader, I believe the increase in gold price is due to fundamental reasons. The pullbacks we are currently seeing are actually a good sign that gold prices are not in a bubble. And I am looking at them as a buying opportunity. People are losing trust in paper-based currencies, because it’s so easy for central banks to just print more paper these days. Hence why central banks are running towards gold! We are living in an economic environment where countries are racing to devalue their currencies—they continue to print more. Until they stop—and I don’t know if they can—gold prices will continue to shine.