the secret return to a 'gold standard'

The Secret Return to a 'Gold Standard'


Although it happened more than 40 years ago, many Americans still rue the day back in
1971 when US President Richard M. Nixon effectively took this country off the so-called "gold
standard."
Under a true gold standard, paper notes are "convertible" into pre-determined, fixed
quantities of the "yellow metal."
What actually happened back in 1971 was that President Nixon – facing huge budget and
trade deficits, and a plunging dollar – enacted a series of economic moves, including the
unilateral cancellation of the direct convertibility of the US dollar into gold.
By slamming the "gold window" shut, Nixon also brought down the curtain on the existing
Bretton Woods system of global financial exchange.
The fallout was immediate, creating a situation that financial historians still refer to as the
"Nixon Shock."
Proponents of the gold standard say the real damage is still being wrought: That decision
four decades ago led directly to the uncertainty, volatility and irresponsibility that we see in
the US economy and global financial markets today.
Whether you agree or not is a topic for another time.
But what I'm here to tell you today is that the world's central banks have quietly – almost
secretly – returned the world to a new version of the gold standard.
Back in 2010, the world's central banks became net buyers of gold for the first time since
1988. Buying ramped last year and net purchases exceeded 455 metric tons (tonnes). That
was the largest net purchase since 1964.
But the world's central bankers will handily eclipse the 2011 totals here in 2012: They will
purchase a projected 493 metric tons this year as they expand reserves to diversify away
from the US dollar and protect their countries' economies against inflation, Thomson Reuters
GFMS said.
And GFMS said you can expect central banks "to remain a significant gold buyer for some
time to come."
Real Asset Returns Editor Peter Krauth told me he completely agrees with that assessment.
BY WILLIAM PATALON III
November 6, 2012 • Reprints
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As Peter explained: "You can see their thinking, Bill ... you can see them saying: ‘We have
enough of all these fiat currencies in our bank reserves – now we want something that's
going to counter those holdings, that's a valuable asset and that has all the right fundamentals
in place.' And that asset is gold."
We're seeing the results of this "new gold standard" in the marketplace...
For instance, gold had its biggest day in three weeks on Thursday after reports surfaced that
central banks in Brazil and Turkey boosted their holdings.
Turkey purchased 6.8 tons in September, and Brazil added 1.7 tons – its first purchase in
nearly four years.
The countries that are most-aggressively adding to their yellow-metal reserves include South
Korea, The Philippines, Kazakhstan, Russia, Mexico, Turkey, Argentina and the Ukraine.
Gold has risen 11.1% so far in the third quarter and was up 16% on a year-to-date basis. It
has outperformed virtually all of the world's top stock markets so far in 2012, according to a
report by the World Gold Council.
And here's a key point: Central bankers aren't day-traders. So when they make a move like
this, there's generally a long-term time view.
"All the fundamentals are in place for this to continue," Peter told me. "These guys tend to
have a long time frame in mind. So when you see a shift like this, it's a big deal. And the
chances are that this could last for a very long time."
In a recent report, 24/7 Wall Street did a nifty job ranking and analyzing the Top 10 global
gold holders. To understand just how committed the world's central bankers are to this "new
gold standard," let's look at a modified version of the news service's rankings and notes.
We'll rate which countries will be buyers, holders or sellers of gold (we're including the
International Monetary Fund, or IMF, here as well, which brings our list to 11). And that will
give us a big hint about the future direction of gold prices.
And we get to start here at home, with the USA:


1. United States
Gold Reserves (in metric tons, or tonnes): 8,133.5 tonnes.
Percentage of Total Foreign Reserves: 75.4%.
Gross Domestic Product (and Global Ranking): $15 trillion (No. 1 economy).
Buy, Sell or Hold (BSH) Gold: Washington keeps telling us inflation is no problem. And with
the mountain of debt we've now taken on thanks to Wall Street's latest shenanigans, we may
not be a buyer. But because of the way Team Bernanke keeps running its monetary printing
press, we also can't be a seller. There's one wild card: America's massive New Energy
reserves (natural gas and oil shale). If those reserves are fully exploited, untold wealth will be
created – enough to turn the country from an over-extended creditor back into a true
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superpower. But that's a longshot right now. Hold.


2. Germany
Gold Reserves: 3,395.5 tonnes.
Foreign Reserves Pct: 72.4%.
GDP (Rank): $3.6 trillion (No. 4).
BSH Gold: The Central Bank Gold Agreement calls for Germany to be a gold seller. But as
the captain of Team Euro – and to keep its own economic future from getting chewed up by
the euro-zone contagion – Germany has to maintain its underlying asset base. So even if it's
not a buyer, you can bet it won't be a major seller. Hold.
2a. International Monetary Fund (IMF)
Gold Reserves: 2,814 tonnes.
BSH Gold: Although not a country with a central bank, the IMF is a powerful banker, with
reserves hefty enough to take note of. It adopted a new income model and sold gold in the
2009-2010 timeframe as part of its plan to shore up its own finances – and brought in about
$3.8 billion more than expected because of higher-than-anticipated gold prices. In late
September, the IMF said it agreed to distribute $2.7 billion in windfall profits from the sales to
subsidize loans to poor countries. To maintain its relevance, the IMF is supposed to keep a
specific portion of gold in reserve. And sales are made slowly - over an extended stretch – to
keep from hammering prices. Hold.


3. Italy
Gold Reserves: 2,451.8 tonnes.
Foreign Reserves Pct: 72%.
GDP (Rank): $2.2 trillion (No. 8).
BSH Gold: An economy so troubled that it's ranked as one of the "PIIGS" nations (Portugal,
Ireland, Italy, Greece and Spain), Italy was also part of the Central Bank Gold Agreement. If
it sells gold to raise money, it will lose the financial cushion it and other Eurozone countries
will need if the EU disintegrates. But it also probably can't afford to be a buyer. Hold/Sell.


4. France
Gold Reserves: 2,435.4 tonnes.
Foreign Reserves Pct: 71.6%.
GDP (Rank): $2.2 trillion (No. 5).
BSH Gold: Like other euro-zone countries, France faces a quandary. It wants to remain a
powerful economy, but has to navigate the EU crisis. It's part of the gold agreement. And
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new French President Francois Hollande rails against the austerity policies of his
predecessor, and has economic initiatives he wants to implement. Those might force France
to be a seller. However, like other EU countries, it will need a cushion in the case of a
breakup or long malaise. Hold/Sell.


5. China
Gold Reserves: 1,054.1 tonnes.
Foreign Reserves Pct: 1.7%.
GDP (Rank): $7.3 trillion (No. 2).
BSH Gold: China added 454 metric tons of gold between 2003 and 2009. And all its plans
and objectives - which include being the world's largest economy - will require it to inspire
confidence, eradicate uncertainty and opacity, and become "transparent" to foreign
investors. Adding hard assets like gold is a great way to do all that. It'll be a big buyer of gold
going forward. Buy.


6. Switzerland
Gold Reserves: 1,040.1 tonnes.
Foreign Reserves Pct: 11.5%.
GDP (Rank): $660 billion (No. 19).
BSH Gold: Tiny Switzerland ranks 95th in the world for population and 19th for GDP, but is
ranked No. 6 as a holder of gold for one simple reason: Tiny Switzerland is the world's
private banker. Switzerland sold gold from 2003 to 2008. But as long as its private-banking
cachet remains, this country will always be a big holder of gold. Hold.


7. Russia
Gold Reserves: 936.7 tonnes.
Foreign Reserves Pct: 9.6%.
GDP: $1.85 trillion (No. 9).
BSH Gold: Like China, Russia has some big-time global-economic ambitions. And like China,
Russia will create a huge foreign reserves cache as it does so. Massive gold purchases will
be a part of that formula – and already have been. A 24/7 Wall St. analysis demonstrated
how Russia's gold reserves reached 784 metric tons by the first part of 2011: It added to
existing reserves by purchasing 70 metric tons in 2007, more than 100 in 2009 and 120
more in early 2011. And while the numbers have yet to be released, the World Gold Council
already has said that Russia added more gold, meaning the 937 metric tons figure we
reported above is already outdated. Just like China, count Russia in as a big buyer going
forward. Buy.


8. Japan
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Gold Reserves: 765.2 tonnes.
Foreign Reserves Pct: 3.2%
GDP (Rank): $5.86 trillion (No. 3).
BSH Gold: Japan is trapped in an infinite loop of price declines that discourage investment
and make consumers put off spending, which in turn weighs on demand and output. The
government is planning a $2.5 billion stimulus infusion which 24/7 Wall Street reports is
funded by gold sales. But an analysis done by another researcher back in April concluded
that Japan, India and China were making big gold purchases. In the long-run, thanks to its
aging population, Japan will need to be a buyer to support its massive monetary base.
Hold/Buy.


9. The Netherlands
Gold Reserves: 612.5 tonnes.
Foreign Reserves Pct: 59.8%.
GDP (Rank): $838 billion (No. 17).
BSH Gold: If you recall our July 2 report about "Tulip Mania" ("The Flowering Inferno"), then
you understand that The Netherlands has a long history of wealth. That helps explain why
such a small country has so much gold. Also worth noting is the fact that, despite being part
of the gold-sales agreement, The Netherlands did not sell all that it could have. That probably
means it's not going to be a big seller going forward - instead keeping much of what it has as
a protective safety net as the Eurozone continues to bleed, or collapses completely. Hold.


10. India
Gold Reserves: 557.7 tonnes.
Foreign Reserves Pct: 10%.
GDP (Rank): $1.82 trillion (No. 10).
BSH Gold: India has been a steady buyer of gold for a long time, and now is a big buyer of
the yellow metal. In fact, when the IMF sold its gold back in 2009, India muscled up and
spent $7 billion to acquire 200 metric tons of the metal. You can bank on that aggressiveness
continuing - for one very good reason: It's one of the easiest and most-effective ways for the
government to support its currency in the face of a whipsaw economy. Buy.



Conclusion
If you're a true "gold bug," or are just an investor who's bullish on gold, you have to like what
this list of the world's biggest holders of gold says about the direction of gold prices for the
next few years. It's highly bullish.


Here's why. Even with the problems we see in Europe, none of the biggest holders look to be
really huge sellers. And the buyers on this list look to be big buyers.
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© 2012 Resource Investor, A Summit Business Media publication. All Rights Reserved.


Remember, too, that the lion's share of the most-aggressive buyers – South Korea, Turkey,
some nations in Africa, and the many others – aren't even on this list.


And here's one other great point that Peter made as we talked late last week: These secular
trends tend to be pretty steady, on both the downside and the upside.


The fact that central banks were out of the gold market from 1988 to 2010 – 22 years – says
that they'll be in the market for a long stretch, too.


"Even if you look at this conservatively, it's clear that we're just at the start of this – meaning
the central bankers are going to be buyers for an extended period," Peter said. "Even if this
upturn in buying only lasts half of [the 22 year downturn], we're talking 11 years – meaning
we're only two years into this."


And that tells us there's plenty of money to be made from this no-longer-secret global return
to the "gold standard."


"Some investors look at the current price of gold, and view it as expensive because it's more
than doubled in the last few years alone," Peter said with an audible chuckle. "But given what
I see coming at us, I can say this with a high degree of confidence: Three or four years
from now, we're going to look back on this as a period when gold was still cheap, and where
the profit potential was vast, because of where prices are going to go from here.”