Half of World Gold Production
Being Bought by Central Banks

gold bullionWow; 57.9 tons of gold bullion is a lot of gold.

And that’s exactly what they bought.

In March 2012 alone, 57.9 tons of gold bullion was purchased by world central banks. To give some perspective on this number, in 2011, central banks bought just under 440 tons of gold bullion, a rate of 37 tons a month (source: World Gold Council).

The International Monetary Fund (IMF) just reported that, in March, central banks took advantage of the lower prices in gold bullion to buy significant amounts of the metal.

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Should the current rate of buying by central banks continue at this pace, central banks will purchase a staggering 700 tons of gold bullion in 2012!

As I’ve been writing in these pages, the gold demand from central banks does not include the largest central bank buyer: the People’s Bank of China. The Chinese are not reporting their gold-buying numbers to the IMF, but we know they are accumulating a staggering amount of gold bullion to back their currency, the yuan.

Over the last decade, the supply of gold bullion mined out of the ground has been fairly constant: 2,500 tons per year (source: World Gold Council). The fact is that gold bullion is difficult to find under the earth’s crust.

In 2010, central banks barely bought any gold bullion, while supply remained at 2,500 tons. In 2011, central banks bought 440 tons, with supply remaining relatively constant at roughly 2,500 tons. In 2012, at their current buying pace, central banks are on track to buy 700 tons of gold. And, if the People’s Bank of China continues to accumulate all it can, it is safe to say roughly half of the gold bullion supply will be picked up by central banks in 2012.

With supply steady and central bank buying increasing at a fast rate, gold bullion prices will have to move higher to satisfy other investor demand around the world. (See: Two Major Countries Join in China’s Quest for Gold.)

The reason central banks are buying gold bullion is that Japan’s weak economy may once force Japan to resort to money printing. The European Union is in crisis and will need to resort to money printing. The U.K. is now officially in a recession, which means it may be just a matter of time before it returns to money printing, as it has in the past in its attempt to resuscitate its ailing economy. (See: Money Printing by Any Other Name.)

As I’ve detailed in recent issues of Profit Confidential, the U.S. economy is not as strong as news headlines would suggest. As soon as the stock market starts to tank, QE3 will be announced.

With money printing seemingly the only solution to the world’s economic growth problems, central banks have decided to protect themselves by buying more gold bullion than ever before.

I suggest that my dear readers follow the example of world central banks and use weakness in the 10-year-old gold bull market as an opportunity to make gold-related investments. I would urge you to take a hard look at the senior gold mining companies; they are trading at historically low levels when compared to the current price of gold bullion.

Michael’s Personal Notes:

A perfect contrarian indicator may now be telling us that it is getting close to the time to sell stocks.

Alan Greenspan, who began the low interest rates policy at the Federal Reserve, said this week that stocks look very cheap to him, citing a low price-to-earnings (P/E) ratio for the stock market as the key reason.

He stated that stock prices will rise, as low interest rates provide few alternatives for income investors—so buy stocks now while they’re cheap.

Of course, he forgot to mention that the rate of corporate earnings growth has been decelerating at a very rapid rate. He also forgot to mention that artificially low interest rates, which he jump-started, make P/E ratios look better than they really are.

In the third quarter of 2011, corporate earnings growth, year-over-year, was 17% for the S&P 500. In the fourth quarter of 2011, year-over-year, corporate earnings growth was only 5.5%, even though interest rates remained at historic lows.

The corporate earnings numbers for the first quarter of 2012 are not all out yet, but they point to a continuation of a decelerating corporate earnings growth trend.

In my opinion, Greenspan, while Chairman of the Federal Reserve, kept interest rates at artificially low levels for a prolonged period of time after the economy had gained some traction in 2003 and 2004. Had he raised interest rates, he would have slowed the housing market, thus helping prevent the housing market from reaching bubble levels, and then crashing.

Greenspan argues in his best-selling book that the Federal Reserve is not as independent as people believe. He notes that there is huge political pressure on the Federal Reserve to keep the economic growth engine running at a fast pace.

Does this mean he is excusing himself for keeping interest rates artificially low because he had to bend to political will?

The focus when Greenspan was in office should have been on the real economy, which, as a consequence to this “political pressure,” allowed low interest rates and lax regulation to lead to the real estate crash and what is being dubbed the “Great Recession,” which we have yet to recover from here in America.

We are all entitled to an opinion. I was never a fan of Greenspan or his initial low interest rate policies. On the other hand, I’m a big fan of current Fed Chairman Ben Bernanke. I believe Bernanke saved this country from the Great Depression Part II.

As for Greenspan, when the housing market started to fall in 2006, I still remember him saying that the housing market contraction would be confined and would not affect the remainder of the economy!

Through the years, Greenspan has become a contrarian indicator for me. Just do the opposite of what he says and you’ll do fine. And if Greenspan is saying now is a good time to buy stocks, I know it’s getting close to the time to unload stocks.

Where the Market Stands; Where it’s Headed:

We are in a long-term secular bear market. Phase I of the bear market was completed when the Dow Jones Industrial Average fell from 14,164 in October of 2007 to 6,440 in March of 2009.

Phase II of the bear market started in March of 2009 and continues today. The purpose of a Phase II bear market (often referred to as a “sucker’s rally”) is to lure investors back into the stock market under the false pretense that the economy is improving.

Phase III of the bear market, the next phase, will bring stocks back down again.

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings, is a recipe for a financial catastrophe.” Michael Lombardi in PROFIT CONFIDENTIAL, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.