European Central Banks Are Hungry for Gold

Gold and silver continue to capture the interests of investors around the world.  Although China and India are the biggest buyers of precious metals, other parts of the world are starting to realize the benefits of gold and silver.  For the first time in more than 20 years, European central banks have become net buyers of gold.

According to data from the International Monetary Fund and the European Central Bank, European central banks have added 25,000 ounces of gold to their reserves in 2011.  While this amounts to less than one ton, it represents a change in sentiment.  Jonathan Spall, director of precious metals sales at Barclays Captial said, ” We’re going back to a time when gold is seen very much as money.  It has been a complete reversal of the attitudes we saw during the 1990s.”  Financial Times reports that gold sales have averaged nearly 400 tonnes a year since 1999.  This is interesting because there is an agreement in place known as the third Central Bank Gold Agreement, which includes central banks in the European Union, Switzerland, Sweden, and the International Monetary Fund.  The agreement is in place until 2014 and sets the maximum annual gold sales pace at 400 tonnes from the participating central banks.  In essence, central banks have gone from selling the most gold allowable under the agreement, to becoming net buyers of gold.  According to the World Gold Council, European central banks have not been net buyers of gold since 1985.

Various countries around the world are making gold purchases in order to diversify their fiat currency holdings.  Earlier in the year, Mexico purchased nearly 100 tonnes.  Russia continues to reduce its U.S. Treasury holdings while also buying gold. In July, South Korea’s central bank bought gold for the first time in 13 years.  More recently, Romania’s central bank announced  it will discuss a proposal made by President Traian Basescu to double the country’s gold reserves to almost 200 tonnes.

Natalie Dempster, the head of government affairs at the mining industry-back group, explained, “The motivation for European central banks to diversify out of gold into dollar-denominated assets has been negatively impacted by U.S. fiscal and monetary policy.” Tomorrow, the Federal Reserve Bank will begin its extended FOMC meeting.  Investors should pay close attention as the meeting has the potential to negatively impact U.S. fiscal and monetary policy even more.  The Federal Reserve is expected to unleash anything from Operation Twist to Quantitative Easing 3.

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