Do Central Banks Still Love Gold?

Source: Eric McWhinnie, Wall St. Cheat Sheet  (4/28/12)

"Central banks around the world continue to prepare for currency devaluations by purchasing gold."


Despite experiencing a sharp sell-off on Wednesday, gold and silver prices fully recovered and gold even posted its best weekly gain since February. Both precious metals received support and climbed higher as more disappointing economic data hit the market, fueling speculation for additional Federal Reserve easing. Furthermore, central banks around the world continue to purchase safe-haven metals.

Precious metals had already been performing well since Fed Chairman Ben Bernanke said easing "tools remain very much on the table and we will not hesitate to use them," earlier in the week. However, gold and silver added to gains as new gross domestic product data showed Bernanke may be tempted to use those tools sooner, rather than later. On Friday, the Commerce Department announced that U.S. economic growth declined to its slowest rate since the third-quarter of 2011. The GDP, the broadest measure of all goods and services produced in a country, grew at an annual rate of 2.2% in the first-quarter, missing estimates of 2.5%.

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Jim Baird, chief investment strategist at Plante Moran Financial Advisors, explained, "While the economy continued to grow in the first quarter, the expansion remains modest in pace and subpar from a historical perspective. The economy is still on an uncertain footing and a window of risk exists, given the global slowdown that is unquestionable underway and the recessionary environment now enveloping multiple developed economies," according to Forbes. While markets anticipate more easing from the Fed, the Bank of Japan already announced to purchase an additional 10 trillion yen of Japanese government bonds. The central bank voted unanimously to expand its asset purchase program to 70 trillion yen, in addition to near zero interest rates. The announcement reinforces the "race to bottom" environment in fiat currencies.

Central banks around the world continue to prepare for currency devaluations by purchasing gold. According to new data released from the International Monetary Fund, Mexico added 16.8 tons of gold worth about $900 million to its reserves in March. Meanwhile, Russia and Turkey added about 16.5 tons and 11.5 tons, respectively. Central banks around the globe added a record 440 tons of gold last year, the most in almost 50 years, and will most likely set another record this year.

GoldCore explains, "Central banks are expanding reserves due to concerns about the dollar, euro, sterling and all fiat currencies. There is an increasing realization amongst central bankers that gold is a less risky alternative to most paper currencies and a recent survey showed that the majority of central bank reserves managers were favorable towards gold. Signifying the mood of caution among the world's central bankers, 71% of those polled said gold was a more attractive investment than it had been at the start of last year."

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Eric McWhinnie

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