Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

More World Central Banks Turning to Gold Buying

Friday, November 9th, 2012
By for Profit Confidential

Every once in a while, I read or hear an analyst or economist say that gold bullion has no future and the price of gold bullion will decline because it’s in a bubble.

Sadly, what these financial commentators don’t realize is that gold bullion is money; it stores value.

I’m a strong believer in gold bullion as a hedge against paper money printing gone mad! I believe gold bullion will continue bucking its 11-year uptrend. The fundamentals haven’t changed. Gold bullion still provides safety and can be a hedge against the fiat currency.

Whoever says gold bullion isn’t going anywhere needs to realize that we are in a period of time where central banks around the world are devaluing what they have created. These central banks need to back their currency with something other than a devaluing U.S. dollar. Hence, central banks around the world are realizing the potential of gold bullion and what it can do for their reserves—and they are scrambling to get more.

In recent developments, the central bank of Brazil increased its gold bullion reserves this past September, for the first time since December 2008, by 1.7 tons, for a total of 35.3 tons, according to the International Monetary Fund (IMF). This central bank owns only about 0.5% of its reserves in gold bullion. (Source: World Gold Council, November 2012.) Even though the purchase looks to be menial, keep in mind that the central bank of Brazil is pursuing a plan to devalue its currency in order to keep the exports flowing. As the bank attempts to further devalue its currency, it will need to buy more gold bullion.

Other central banks around the world are doing the same—buying gold bullion because they are in desperate need of it. Hong Kong’s shipment of gold bullion to China increased 23% in September to 69.7 tonnes. (Source: “PRECIOUS-Gold rises on short-covering, U.S. election eyed,” Reuters, November 5, 2012.) The Chinese central bank will never say when and how much gold bullion it’s going to buy, but it looks to be buying a lot of gold.

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From all of this, it is clear: the demand for gold bullion by central banks is present. I won’t be surprised to see central banks buying more gold bullion—in fact, they have to or their reserves are in danger.

I’m looking at any pullback in the price of gold bullion as a buying opportunity. I will become skeptical of gold bullion when central banks become net sellers of gold bullion and fiat money becomes valuable—something I can’t see happening unless world governments start working at an annual budget surplus as opposed to a deficit…and we know how far-fetched that concept is for politicians.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in Profit Confidential, February 8, 2007. The TSX was one of the top-performing stock markets in 2007, up just under 20% for the year.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles