In the Race of World Central Banks to Print Money, There’s Only One Real Winner

By Wednesday, September 26, 2012

Gold bullion prices have been hovering a little below $1,800 an ounce. As I have been writing, the price chart and demand for gold bullion are still suggesting a bullish outlook for the shiny yellow metal. Year to date, gold bullion has gone up 13.4%.

Thanks to more money printing, the U.S. dollar, which was considered a foreign reserve currency by about 60% to 65% of world central banks (used to be 70% to 75%) is quickly becoming a liability for foreign central banks.

To counter the decreasing value of the U.S. dollar against other world currencies, foreign central banks are taking measure to devalue their own currencies in order to stay competitive. Unfortunately, in most cases, this can only be achieved by printing more of the respective country’s currency.

Gold bullion is currently the only form of currency that is stable, can’t be produced out of thin air, is in limited availability, and has a good store of value. Hence, foreign central banks are buying more of it and gold bullion will continue to shine.

Central banks do not make an announcement before they go out in the markets to buy gold bullion. They report after the purchase. Why? It’s because they want to buy without increasing the price of gold bullion. If one follows the tracks of central banks’ purchase pattern for gold bullion, one can be certain that they are on a buying spree.

Institutional investors in gold are going into this sector and buying after being on sidelines for a while. Gold bullion holdings by institutions have gone up 7.7% to 178,426 contracts for a five-week straight advance. (Source: Bloomberg, September 24, 2012.)

To bring the demand for gold bullion into perspective, the U.S. central bank is the biggest holder of gold bullion. It holds 8,133.5 tons of gold bullion in its vault; compared to China which only has 1,054 tons of gold bullion. The U.S. holds 75.4% in gold bullion compared to 1.7% in holdings for China. (Source: Kitco, September 24, 2012.)

Keep in mind that China has the world biggest foreign reserve of U.S. dollars—a little more than $3.0 trillion at beginning of 2012. (Source: Bloomberg, January 13, 2012.) What are the chances China will buy more gold bullion? Very high, if you ask me.

I’ve been bullish on gold bullion since 2001 and nothing has changed in the gold markets to alter that opinion. Actually, world events as they are unfolding, all that money printing and debt, are just making me more bullish on gold bullion.

There are fundamental reasons behind the current rise in gold bullion prices and speculation is not one of them. Central banks are running towards the yellow metal and will continue to chase it until there is stability in the current global economy. I’ve been saying it for all of 2012: there is great opportunity with the stocks of junior and senior gold-producing companies.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average has lost a couple of hundred points over the past three trading sessions. The euphoria over the Fed’s latest round of money printing is dissipating. Focus is sifting back to the weakening global economy and the credit crisis in Europe. We are near the end of the bear market rally in stocks that started in March of 2009.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Back in January 2002, I personally started buying gold shares.” Michael Lombardi in Profit Confidential, December 13, 2002. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.

About the Author, Browse Michael Lombardi's Articles

Michael Lombardi founded investor research firm Lombardi Publishing Corporation in 1986. Michael is also the founder and editor-in-chief of the popular daily e-letter, Profit Confidential, where readers get the benefit of Michael’s years of experience with the stock market, real estate, economic forecasting, precious metals, and various businesses. Michael believes in successful stock picking as an important wealth accumulation tool. Michael has authored more than thousands of articles on investment and money management and is the author of several successful... Read Full Bio »