Central Banks Are Saying, “It’s My Gold, and I Need It Now!”

Gold (NYSE:GLD) and silver (NYSE:SLV) continue to keep things interesting in the global financial system. Somewhere between debt ceiling threats and Netflix (NASDAQ:NFLX) price increases, gold and silver continue their stance against fiat currencies. Tuesday started rather calmly for precious metals, however, the newly released Fed minutes quickly changed things.  Let’s take a look at the new developments concerning central banks and gold.

Last week, the Financial Times reported that central banks around the world pulled 635 tonnes of gold from the Bank for International Settlements this past year, which represents the largest withdrawal in more than a decade.  Last year, central banks added to deposits of gold at the BIS (a bank for central banks), as opposed to lending it directly to the private sector amid growing concerns over counterparty risk.  The big question is, why are central banks now stuffing their own mattresses with gold? Perhaps central banks are unimpressed with the low interest rates for lending their gold, or maybe they see more troubles ahead.  The chart below shows an interesting story of central banks and their relationship with gold.  After several years of being net sellers of gold, central banks are now net buyers of gold.  Furthermore, Eurozone central banks became net buyers of gold in 2011, which has never occurred since the inception of the Euro in 1999.

 

 

Aside from being net buyers of gold, central banks have been causing a stir in financial markets (NYSE:XLF) with quantitative easing (QE) programs.  For example, as the Federal Reserve injects more stimulus into the markets, the U.S. Dollar (NYSE:UUP) weakens. Investors looking for a safe-haven against inflation and anything else that comes along, run to gold and silver. In May, during the Fed’s QE2, gold reached a record high of $1557, and silver reached almost $50.  On Tuesday, the mere mention of more stimulus caused gold to shoot higher.  Newly released Fed minutes reveal that some members are considering additional stimulus if economic growth fails to improve.  Gold popped on this news, and closed at a new high of $1562.30 an ounce on Tuesday.  Gold miners (NYSE:GDX) such as Yamana Gold (NYSE:AUY) and AngloGold (NYSE:AU) closed 3.13% and 2.87% higher, respectively.

It has only been a little over a month since QE2 ended, and we’re already receiving hints of more stimulus.  You don’t have to be a gold bug to have a reason to hold gold in your own portfolio.  A new study from Oxford Economics recommends holding at least 5% of your assets in gold, and varying economic conditions (QE3 anyone?) can imply higher allocations for gold.

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Disclosure: Long AGQ.