Central Banks buy up gold like there’s no tomorrow!

 by Michael Lombardi

In the gold market, we have previous sellers—central banks—turning into buyers. In 2012, central banks purchased the highest quantity of gold bullion in a single year since 1964. Central banks bought 534.6 tonnes of gold bullion last year. Central banks’ buying increased by 17% year-over-year. (Source: World Gold Council, February 14, 2013.)

But it was in the fourth quarter of 2012 that we saw central banks really ramping up their gold bullion buying. Their purchases increased 29% from the same quarter of 2011—they bought 145 tonnes. The fourth quarter of 2012 marked the eighth consecutive quarter that central banks were net purchasers of gold bullion.

But as central banks bought more gold, gold bullion became a victim of negative sentiment, despite the fundamentals having not changed. In the week ended February 19, 2013, funds lowered their bullish bets on gold bullion by 32% to the lowest level since November of 2008. (Source: Wall Street Journal, February 25, 2013.)

There is some fear central banks might begin to move towards stabilizing their monetary policy, raising interest rates, and stopping the printing of paper money, thus putting downward pressure on gold bullion prices.

Dear reader, the fact of the matter is that damage to the global monetary system has already been done. More paper money printing is paramount to throwing more gas on the fire. Central banks around the world, including our own Federal Reserve, have been printing new money in overdrive mode. The more central banks print, the less value paper money holds.

With the increase in the paper money supply happening all around the world, the supply side of the gold bullion market is entering a rough patch. Central banks can print an unlimited amount of paper money, but they can’t print more gold.

In recent years, there hasn’t been one single major discovery of gold deposits. And the grade (quality) of gold taken out of the ground has also declined. In the 1950s, the average grade of ore was 12 grams of gold per tonne. Fast-forwarding to current grades, miners are averaging three grams per tonne in Australia, Canada, and the U.S. (Source: Mining.com, February 1, 2013.)

In the gold bullion market, the most basic concepts of economics are at play—supply and demand. Central banks are buying gold with both hands, while the lack of any major discoveries and declining gold grades put a dent in supply. All of this makes me more bullish on gold bullion prices.