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Central Banks now Buying Gold


By Jason Hommel          Printer Friendly Version

December 12, 2005

The Russian Central bank is buying up to 1000 tonnes of gold, to double its gold holdings from 500 tonnes, most of which, 377 tonnes, is lent out.

The news of Russian central bank gold buying is getting more press. Either the Russian buying, or the news of the Russians buying, is likely responsible for the recent run up in gold prices.

Analysis: The Russians have $165 billion in their central bank reserves.
500 tonnes x 32,152 oz/tonne = 16,076,000 oz. That's 16 million oz.
At $524/oz., 500 tonnes will be worth $8,423,824,000 That's $8.4 billion dollars.

That's not much money, and it's a lot of gold!

The Russians are only planning on putting 5% of their central bank reserves into gold.

Why is this such a big deal? The world has lots of dollars & not much gold.

Five hundred tonnes is huge in the gold world. World mine supply is a mere 2500 tonnes annually. Total gold mined in all of human history is a mere 150,000 tonnes. Source:

However, buying 16 million oz. of gold will be no problem for the Russians. They have $165 billion dollars to diversify out of.

Let me continue to put 500 tonnes (16 mil. oz.) into perspective:

European central banks agreed to limit their gold selling to 400 tonnes per year, back in 1999. At this announcement back in the fall of 1999, it caused a $70 spike upwards in the gold price, and you can see this spike on any gold chart. Why the spike? Because people realized that the gold selling (and gold lending) by central banks was going to be slowing down. And it has.

And now it has reversed, and is turning into central bank gold buying.

Argentina, South Korea, & South Africa are also gold buyers now.

And now, China, and perhaps all of Asia!

Here's a news article on that:
Asian central banks likely to increase gold reserves!

The official China news source, the "People's Daily Online", reported that "Asian central banks are likely to increase gold reserves."

Quote: "Russia, Argentina and South Africa have decided this month to increase their gold reserves, which reversed the selling trend in six years by world central banks, especially European ones. It is only a question of time for Asian central banks to follow and buy in gold: they hold 2.6 trillion US dollars in foreign exchange reserves, and able to change more of them into gold as a hedge against US dollar falls."

So, how much gold can $2.6 trillion U.S. dollars, held by Asian central banks, buy? More gold than exists in the world! Remember, all the gold ever mined in the history of the world is 150,000 tonnes.

Let's convert that to ounces, shall we?

all the gold ever mined in the history of the world:
150,000 tonnes x 32,152oz./tonne = 4.8 billion ounces.
At current prices of $524/oz., that's 2.5 trillion dollars!

So, what we have is the Russians buying about $8.4 billion worth of gold, and this is causing the gold price to move up.

And now, Asia is going to spend a portion of $2.6 trillion, that's TRILLION, or $2,600 billion, on gold?

Where do you think gold prices are headed? At this point, guessing a final top is ridiculous, but you can know for certain that in the coming months and years, gold is going to go way, way, way up from here. Probably well beyond $10,000 to $30,000/oz.

And Asia's $2.6 trillion is nothing compared to the size of the bond markets. We have $22 trillion in U.S. bonds that could also be sold for gold. After all, big money is FORCED to seek out returns, and protect itself from being devalued.
And Japan alone has about $10 trillion dollars worth of yen that could also buy gold.

What will spook the bond market? Who knows, but it may well be the default of General Motors on almost $300 billion worth of bonds.

I saw Kudlow on CNBC this afternoon, who was mystified by the rise in the gold price. He asked a woman on the show, "Would you be selling gold now?" She responded, "Yes, I would be selling gold now... but I don't have any gold to sell." Classic!

Kudlow concluded that with the new computer age, and with free trade, both pushing down wages and consumer prices, that he couldn't see inflation like we had under Jimmy Carter. What Kudlow fails to realize is that inflation is not rising wages and consumer prices. Inflation is the creation of unbacked paper money, which has happened in the past that is fraud that will be revealed.

Kudlow was also saying "how could the bond market be wrong", given low interest rates, especially in the long bonds, which is now an "inverted yield curve". What Kudlow fails to realize is that acorns can grow into big oak trees, but oak trees cannot grow to the moon. There is an upper limit on growth, especially in big, big things, such as the $22 trillion bond market. It has to go down in value, by definition, if you study compound growth rates. You just can't keep compounding liquid wealth (that competes with gold) that has overgrown the limits of gold, even if you pretend that gold does not exist. Because other people may not choose to live in fantasy land, and because gold does exist, and because other people (that you may do business with) will choose gold, such as all of Asia.

The fact is that bonds and gold are competing asset classes. With gold heading up about 20% per year now for 4 years since 2001 from $255/oz., and no top in sight, why would any sane person choose to hold bonds paying 4%, when inflation is about 7-8%? Bonds are guaranteed to go down in value, and will be forced to buy gold for the returns. It's as simple as that.

Bonds lose money in two ways: Bonds ARE NOW losing value, as the interest rate remains low, since the interest rate is below the rate of inflation. As interest rates MUST RISE, bond values will go down even further.

Now, please don't misunderstand me. Don't go out and buy gold tomorrow, based on what I've written, unless you have well over a billion dollars to invest. If you have less than that, you'd probably do better to buy silver, instead, due to the feared silver shortage caused by 60 years of industrial consumption. A billionaire would have trouble buying that much silver. As gold will go up, silver stands to go up much faster, at a greater percentage rate.

Silver is like the acorn, gold is like a young sapling. The acorn will grow at a much faster rate, and in the end, they may be both the same size!

Jason Hommel