As currency devaluation is becoming a new goal for countries, central banks in the global economy are losing trust in each other.
The notion followed by central banks is that if they devalue their currencies, the prices of their goods become competitive in the global economy. Unfortunately, this may work in some situations, but right now this strategy is questionable. Why? Because to achieve their objectives of devaluating their currencies, central banks are printing money like never before.
Now with all this, think about what happens when central banks increase the circulation of their own currency while the value of their reserves starts to go down as well.
Let me explain…
Most central banks have the U.S. dollar as their main reserve currency. But, as the greenback is also depreciating in value, central banks need to replenish their reserves. And central banks are starting to look elsewhere to top up their reserves. For many central banks, gold bullion is the only option for sound reserves.
The activity of the central banks in the gold bullion market has increased since 2009 when they collectively became net buyers of gold. As I have mentioned in these pages before, central banks will not say when they are going to buy gold bullion or how much they are going to purchase, as they often want to keep their purchases under the radar.
At the World Economic Forum that is going on in Davos, Switzerland, right now, the First Deputy Chairman of Russia’s central bank, Alexei Ulyukayev, said, “We are buying metal and will continue to pursue this course.” He also added, “This is a course of asset diversification in a situation when investing in securities or deposits remains risky.” (Source: Reuters, “Update 3-Russia central bank to keep buying gold – Ulyukayev,” January 24, 2013.)
According to the International Monetary Fund (IMF), Russia’s gold bullion holdings increased by 8.5% in 2012.
Russia is not the only country buying gold bullion; other central banks are doing the same. For example, the Kazakhstan central bank’s gold bullion holdings increased 41% in 2012 over 2011.
Now consider this: Russia, Turkey, Kazakhstan, South Korea, and Brazil are only few of the central banks making headlines about their recent forays into gold bullion buying. What happens if other countries jump in and buy gold bullion?
Just look at the Bank of Canada, the central bank of Canada. Its reserves consist of only $184 million worth of gold bullion versus U.S. dollar holdings of $35.75 billion and other currency holdings of $19.43 billion! Imagine what would happen if a country like Canada (one of many countries whose holdings of gold bullion are minuscule compared to their U.S. dollar holdings) decided it needed to diversify into metals?
The stock market is near a high. The prices of senior and junior gold mining companies are near a low. I know where the best opportunity exists when comparing the two.
Wednesday, January 30th, 2013
By Michael Lombardi, MBA for Profit Confidential