What the Elephant Trying to Get into the Pool Said About Gold

Elephant Trying to Get into the Pool Said About GoldRecently, Alexandre Gautier, the director of market operations at the central bank of France, was quoted saying, “We have no plan to sell gold.” Meanwhile, the director general of the Italian central bank, Salvatore Rossi, said, “Gold underpins the independence of central banks in their ability to (act) as the ultimate bearer of domestic financial instability.” (Source: “Banca d’italia says gold reserves key to cenback independence,” Reuters, September 30, 2013.)

The central bank of France and Italy are a few of the biggest holders of gold bullion when it comes to their reserves. When they say they don’t plan to sell (by the way, Germany has said the same thing), it should be taken as confirmation gold bullion is still very important to central banks.

We all know how fiat currency started. Some central banks didn’t like the idea of the paper money being linked to gold. They resorted to printing more paper money to pay their bills. And many central banks sold their gold bullion once the U.S. dollar was no longer officially linked to its gold reserves. Now, many central banks are having a “change of heart” when it comes to gold bullion. Central banks of emerging markets are adding to their gold reserves as some countries say they just don’t have enough of the precious metal.

As gold investors, we need to remember central banks will never pre-announce when they are going to buy more gold bullion. They are like an elephant trying to quietly step into a swimming pool. Central banks can cause gold bullion prices to quickly skyrocket if word gets out they are accumulating more of it. That’s why we only hear about it after they have made their purchases. And as we have been seeing all year, central banks, especially emerging market ones, have been accumulating gold bullion.

The recent pullback in gold bullion prices has, in my opinion, created a great buying opportunity for investors, and I wonder if central banks are thinking the same.

Today, we are seeing a slight weakness in gold bullion prices in spite of the current debt ceiling debate and the U.S. government shutdown. The last time the U.S. debt ceiling debate was approaching, in 2011, gold bullion hit its all-time high of just over $1,900 an ounce. Today, gold bullion prices stand much lower. Something doesn’t sound right.

Are gold bullion prices being manipulated? No one can say with certainty. But when I look at just the fundamentals of the equation—the shrinking supply and increasing demand for gold bullion—they keep me bullish on the yellow precious metal. I continue to believe it’s a great time to accumulate (or average down into) the depressed gold miners.

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 worse of times ahead.