We read political and economic news reports like any investor does, but we also look for source data ourselves on important subjects. It's fine to let reporters gather information for us, but what we do with that information, and what happens if we trust it blindly, is our own responsibility. There are risks.
A case in point is the recent Bloomberg report that Russia has become the world's biggest gold buyer. That may be true according to current official numbers, but official numbers are not always accurate – and in China's case, they have not been updated since 2009.
So, BIG GOLD Editor Jeff Clark did a little thinking and research of his own on the subject, coming to a strikingly different conclusion than Bloomberg reached. Now, we like the Bloomberg team, and think they do an above average job – and their numbers may even be officially right – but that doesn't make the picture they painted with them accurate.
As always, caveat emptor.
One more quick note: Casey Research Chief Economist Bud Conrad and our Jeff Clark will be speaking at the upcoming Sovereign Society Currency Expo, April 5-7 in San Diego, California. It has a great lineup of other speakers as well, many of whom I've heard address the issues that are most critical in the markets today. Since Casey Research is not having a spring summit this year, this might be just the ticket for staying up to speed on the latest developments. See the Sovereign Society web page for details.
Senior Metals Investment Strategist
|Rock & Stock Stats|
One Month Ago
One Year Ago
|Gold Producers (GDX)||39.89||45.59||53.56|
|Gold Junior Stocks (GDXJ)||17.22||20.46||27.61|
|Silver Stocks (SIL)||19.74||22.42||23.93|
|TSX (Toronto Stock Exchange)||12,686.63||12,641.97||12,362.03|
By Jeff Clark, Senior Precious Metals Analyst
Bloomberg reported last week that Russia is now the world's biggest gold buyer, its central bank having added 570 tonnes (18.3 million troy ounces) over the past decade. At $1,650/ounce, that's $30.1 billion worth of gold.
Russia isn't alone, of course. Central banks as a group have been net buyers for at least two years now. But the 2012 data trickling out shows that the amount of tonnage being added is breaking records.
The following table lists the countries that have added to their gold reserves this year, while the second one tallies those that have been selling. You'll see how recently each country has reported, along with its percentage increase.
Changes in Central Bank Gold Reserves in 2012 (Million Troy Ounces)
|Countries Increasing Reserves|
|Bank for International Settlements|
|Subtotal Gross Increases|
Changes in Central Bank Gold Reserves in 2012 (Million Troy Ounces)
|Countries Decreasing Reserves|
|Subtotal Gross Decreases|
|Total Net Change|
|Sources: IMF, CPM Group. Data as of 1-31-13.|
Based on current data, the net increase in central bank gold buying for 2012 was 14.8 million troy ounces – and that's before the final 2012 figures are in for all countries.
This is a dramatic increase, one bigger than most investors probably realize. To put it in perspective, on a net basis, central banks added more to their reserves last year than since 1964. The net increase – so far – is 17% greater than what was added in 2011, which was itself a year of record buying.
Here's a picture of total central bank reserves since the financial crisis hit.
(Click on image to enlarge)
Whatever gold's price movements, positive or negative, central bank officials have continued adding a lot of ounces to their reserves.
But this understates the case, because most of the data exclude China, as well as a few other small countries. China last officially reported gold reserves in 2009, so the totals in the chart since then exclude whatever its purchases might have been.
Here's where it gets interesting: Bloomberg claimed that Russia has been a bigger buyer of gold over the past decade than China – by a full 25%. Based on data about gold imports through Hong Kong and the fact that, for the most part, Chinese production doesn't leave the country, it seemed to me that this could not be right.
The Chinese central bank holds an official 1,054 tonnes of gold in its reserves. Bloomberg states, based on IMF data, that China has added somewhere around 425 tonnes over the past decade.
I can't say exactly what the correct number is, but the Bloomberg number almost has to be wrong. Here's why:
So Bloomberg is essentially saying that roughly 10% of the total gold available inside the country during that period was added to China's reserves. While it's true that Chinese citizens are buying a lot of gold (though perhaps more silver), it's highly doubtful that private parties bought 90% of all the gold brought to the Chinese market during this period. I think – but can't prove – that China's central bank is buying more gold and at a faster pace than its Russian counterpart.
Jim Rickards, a highly respected author and hedge fund manager, said last month that China has probably already accumulated between 2,000 and 3,000 tonnes of additional gold reserves. If he's right, that would be roughly double or triple the 1,054 tonnes it reported in 2009 – not the 40% increase Bloomberg's numbers suggest.
At the very least, we can say that the Bloomberg report left consideration of China's imports and production out of its report naming Russia the top gold buyer of 2012. Okay…but so what?
Well, Jim thinks the next big catalyst for gold will be an announcement from China about its reserve position. Here's what he told me in late December (which we reported in the January issue of BIG GOLD, my precious-metals advisory).
"The catalyst for a spike into the $2,500 to $3,000 price range for gold will be an announcement by China, probably in late 2013 or 2014, that they have acquired 4,000 tonnes or more in their official reserve position. This will put China on an equal footing with the US in terms of a gold-to-GDP ratio, and validate gold as the real foundation of the international monetary system. Once that position is validated, gold will move to the $7,000 range in 2015 and beyond."
Even if Jim's estimate is high or China doesn't make an announcement until later, it's clear that central banks around the world are buying gold in record quantities.
It almost makes you wonder… do they know something we don't?
The Russians gave us some hints.
Evgeny Fedorov, a lawmaker for Putin's United Russia Party, said last week, "The more gold a country has, the more sovereignty it will have if there's a cataclysm with the dollar, the euro, the pound, or any other reserve currency."
President Vladimir Putin told his central bank not to "shy away" from the metal, adding "After all, they're called gold and currency reserves for a reason."
The Chinese have been quiet on this topic recently, after being very vocal a few years ago. Here's a recent quote.
"The current international currency system is the product of the past," said Hu Jintao, General Secretary of the Communist Party of China.
Others have provided clues as well.
"We're in the midst of an international currency war," said Guido Mantega, finance minister of Brazil.
"Quantitative easing also works through exchange rates… The Fed could engage in much more aggressive quantitative easing, to further lower the dollar," said Christina Romer, former chair of the Council of Economic Advisors.
Economist Kyle Bass recently spoke to a senior member of the Obama administration about its planned solutions for fixing the US economy and trade deficit. When he asked, "How are we going to grow exports if we won't allow nominal wage deflation?", the answer he got was, "We're just going to kill the dollar."
Yes, we're talking about the US dollar. Perhaps some investors have gotten complacent about the risks to the world's reserve currency – but not central bankers. It's not hard to see why: whether they admit it or not, central bankers must know what it means to run the printing presses the way the US has since 2008, even if price inflation is not immediately obvious. It's no surprise they want to hedge their bets, moving more reserves into something with actual value... something that can't be debased by a few computer keystrokes by an increasingly unfriendly government.
The US dollar has been the world's reserve currency since WWII. That's beginning to change, and the movement into gold is just one facet of that change. The buying by central banks is exactly what one would expect to see as we approach the end of the dollar hegemony.
The message from central banks is clear: they expect the dollar to move inexorably lower. It doesn't matter that it's been holding up against other currencies or that the economy might be getting better. They're buying gold in record amounts because they see a significant shift coming with the status of the dollar, and they need to protect themselves against that risk.
This leads to a second message: gold is not overpriced, in spite of the 500%+ increase since 2001. Indeed, with the recent correction, central banks are likely buying more, even as you read this.
Central bank gold buying will continue, of that we're certain. Even after Putin's binge, gold accounts for only 9.5% of Russia's total reserves. China's 1,054 tonnes is roughly 2% of its reserves. It's clear that both countries, along with others, have decided to accumulate as much gold as they can, as quickly as they can, before the dollar's decline becomes more pronounced... and permanent. This could explain why some central banks don't publicize their purchases. It also means that Bloomberg and other mainstream media outlets could be caught off guard when China announces higher gold reserves than expected – perhaps much higher.
Clearly we should take notice. If central banks are preparing for a major change in the value of the dollar, shouldn't we? The fact remains that the US dollar cannot and will not survive the ongoing abuse heaped upon it by government planners and federal officials. That not only means the gold price will rise, but that many, if not most currencies, will lose a significant amount of purchasing power. This has direct implications for all of us.
Embrace the messages central bankers are telling us – the ones they tell with their actions, not their words. Buy gold. Your financial future may very well depend upon it.
The World Gold Council released its Gold Demand Trends report last week. Particularly strong demand in the fourth quarter of 2012 (41% year-on-year) allowed India to preserve its status as the #1 gold consumer, though China is getting close, trailing by only 88 tonnes (2.8 Moz) over the full year.
Global gold demand fell back by 3.9% to 4,406 tonnes (141.6 Moz), although in value terms it hit an all-time high of US$236.4 billion. Full-year demand from India was down 12% from the previous year, which was not unexpected considering the challenging domestic economic conditions and the political will to curb gold demand within the country by raising duties. China's year-on-year demand was flat, reflecting the impact of economic slowdown. Central bank purchases rose by 17% over 2011, totaling 534.6 tonnes (17.2 Moz), the highest level since 1964, as our lead article points out. Global investment in ETFs in 2012 thrived, rising 51% over the preceding year. The average price of gold in 2012 was $1,669/oz, up 6% from $1,571.5/oz in 2011. Gold demand in terms of volume fell, though that's likely because the average price was higher.
Gold demand results for 2012 were impressive, considering the price has remained below its all-time high set in 2011. The amount of money spent on the yellow metal continues growing and shows that interest remains strong.
Editor's Note: WGC and IMF estimates of central bank reserves often differ, so these are different from what was mentioned in the Bloomberg article referenced above. We tend to place greater weight on the WGC numbers.
The Australian minerals resource rent tax (MRRT) hasn't exactly lived up to its creators expectations so far. It raised only A$126 million in the first six months since introduction – a far cry from the expected full-year revenue of A$2 billion. The Australian opposition criticized the country's Treasurer Wayne Swan for spending more than the tax is making by saying, "you are almost in idiot territory if you're spending the money ahead of its receipt!"
In response, Swan blamed the current commodity weakness for the lower-than-expected revenues, which hardly explains the shortfall.
We wish more governments that were so willing to tax "excess" mining profits would face reality and realize the unintended consequences of their greedy actions. Will the lower tax and royalty revenue they receive make them reconsider their assumptions of how profitable mining companies really are? We shall see.