According to the International Monetary Fund (IMF), central banks bought another 70.3 tonnes of gold bullion in April.
While gold prices trended lower, there were many that once again suggested that the gold bullion bubble had finally popped. As I have been arguing, gold bullion has never reached a bubble level in this current run, so how can it pop?
Furthermore, despite lower gold prices, central banks around the world continue to pile into gold bullion. We’ll see how the rest of 2012 shapes up; but right now, if central banks continue at this pace of gold bullion buying, they will surpass their record purchases of last year.
Asian central banks and emerging economy central banks continue to lead the world in gold bullion purchases. As I’ve been writing in these pages, the Asian cultures view gold bullion differently than we do here in North America.
As the financial crisis in Europe continues to escalate and central banks including the U.K. and Japan continue to print money, Asian central banks will buy gold bullion as currency instead of the euro, the yen or the pound, and as an insurance policy against another financial crisis and/or money printing.
The Philippines was the largest purchaser by far in March 2012: 32 tonnes. It is important to note that the country is behind in reporting to the IMF. These 32 tonnes of gold bullion were purchased in March. This was the largest addition to a country’s reserves since Mexico purchased 78 tonnes of gold bullion in early 2011. Twenty percent of the Philippines’ currency reserves now consist of gold bullion.
This is the seventh month in a row that the Philippines’ central bank has been buying gold bullion, as gold prices have been correcting.
Turkey’s central bank was the largest buyer in April (we don’t know what the Philippines did in April), buying 29.7 tonnes of gold bullion, while gold prices were falling.
Does it sound like a bubble if buyers are stepping in while gold prices decline? If it were a bubble, people would be selling as prices decline in the hopes of getting out at any price before prices completely collapse; that is the nature of bubbles.
Mexico’s central bank purchased 2.92 tonnes of gold bullion in April; while Kazakhstan purchased gold bullion for the fifth consecutive month: 2.02 tonnes in April.
What is important to observe can best be explained by the example of Sri Lanka. It has added just over two tonnes of gold bullion since the beginning of 2012. While not a large buyer of gold bullion in terms of tonnes, gold bullion as of April now represents an incredible 39% of the central bank’s reserves.
From what I can see, these central banks are using the recent drop in gold prices to accumulate. More importantly, they are adding gold bullion to their currency reserves, voting with their money by saying they have less faith in the major central banks of the world that drive the world economy—the U.S., Europe, and China—and so are voting to protect themselves with gold bullion.
Do as central banks do, not what they say. (Also see: Japanese Pension Funds Buys Gold as Currency.)
Where the Market Stands; Where it’s Headed:
If today were the last trading month of May, most investors would be happy to put the month behind them. As of yesterday’s close, the Dow Jones Industrial Average has fallen 758 points in May, or 5.6%.
Economically, the remainder of 2012 looks very weak. Last week, Lowes Companies, Inc. (NYSE/LOW), the world’s second biggest home improvement company, lowered its earnings forecast for the full 2012. The company said it was cautious about the economy.
Interest rates cannot stay at zero for ever, central banks cannot endlessly print money, and the U.S. government cannot continue to borrow at its reckless pace.
We remain entrenched in a bear market rally that started in March of 2009.
What He Said:
“Home sales down 8.4%, could be the bottom,” read the headline in last Friday’s USA Today. What do they know that I don’t? They know what realtors and their associations tell them and that’s about it. Unfortunately, the real estate news is predominately written by reporters—not real estate investors with years of experience to share. The hard facts about the real estate market in the U.S. are truly scary. How can the U.S. economy escape the hard landing in U.S. home prices? As we’ll soon find out, it simply can’t!” Michael Lombardi in PROFIT CONFIDENTIAL, January 31, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.