One of the objectives of my alerts at GoldMoney.com is to spread the truth about gold. When I see something that needs correcting, I'll bring it to your attention. Accordingly, I would like to correct the following dispatch from Reuters:
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KALGOORLIE, Australia, Aug. 5 (Reuters) -- Central banks worldwide sold a combined 280 tonnes of gold in the first half, the same as the first half of 2002, but still hold enough to match global demand for nearly a decade, researcher Gold Fields Mineral Services said on Tuesday.
The 15 central banks in Europe which agreed in September 1999 to limit combined sales to 400 tonnes a year, accounted for 80 percent of the sales between January and June, Gold Fields analyst Tim Spencer told Reuters. But the sales hardly made a dent in central bank caches of the precious metal. "The banks still hold 32,200 tonnes of gold," Spencer said....
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In fact, central banks do NOT hold 32,200 tonnes of gold. They hold far less. How much less is a hotly debated.
There are two camps. Here is an excerpt explaining these two points of view, which is taken from my recent report in the Freemarket Gold and Money Report, entitled "More Proof."
In recent years several efforts have been made to overcome the inadequate reporting of central banks in order to determine the weight of gold dishoarded from their vaults. Many people continue to accept the results prepared by Gold Fields Mineral Services, which have generally stated that around 5,000 tonnes have been removed from central bank vaults.
But I dismiss this number because GFMS surveys do not capture the weight of gold borrowed by commercial banks to fund their national currency assets, and my assessment is that this weight of gold represents the largest portion of gold loaned out by central banks.
Consequently, I have relied upon the work completed by Frank Veneroso and Reg Howe. Both of them have used a different methodology to reach basically the same conclusion -- that some 15,000 tonnes of gold have been removed from central bank vaults through lending and other forms of credit extension, such as swaps.
Frank Veneroso determined this number from a supply-and-demand perspective using various historical analyses, levels of economic activity, and other statistics. Veneroso's most recent report, "Gold Derivatives, Gold Lending, Official Management of the Gold Price, and the Current State of the Gold Market," has been posted by GATA here:
http://www.gata.org/Veneroso1202.html
Howe has concluded that the weight was 15,000 tonnes by analyzing the derivative activity of banks that is reported by the Bank for International Settlements. See the article posted on his Internet site, "Gold Derivatives: Moving Towards Checkmate":
In short, depending upon which of the two camps one falls into, central banks hold only some 17,000 tonnes or 27,000 tonnes of gold, not 32,200 tonnes.
In my view, 17,000 tonnes is the more accurate number, but here's a curious irony. Mr. Spencer, who according to the Reuters article works for Gold Fields Mineral Services, didn't even get their 27,000 tonnes number right.
Whether the number is 17,000 tonnes or 27,000 tonnes or 32,200 tonnes, it sounds like a lot of gold, doesn't it? And that is how gold bears like to use this number -- as a means of intimidating gold buyers. By referring to this weight of gold, it helps to portray central banks as a force to be reckoned with in the market, which is an aim that serves the purpose of gold bears and central banks alike.
But there is no reason to be intimidated by what central banks hold.
At $350 per ounce, the price of those 17,000 tonnes is only $191 billion. Bill Gates, Paul Allen, Warren Buffett, and a couple of their friends could put together the cash to "take out" the central banks.
Or look at it this way. There is about $30 trillion of national currency now circulating in the global economy. Let's assume that people around the world start getting nervous about the financial uncertainty we all face today and start converting some of their national currency into gold for safety. Let's further assume that enough people get nervous so that 1 percent of the purchasing power of national currency goes to gold.
Well, that meager 1 percent represents $300 billion in purchasing power, which is a value some 57 percent greater than all the gold held by central banks.
Imagine the impact on the price of gold as people move from national currency into the safety of gold.
So the next time some gold bear or central banker starts talking down the gold price, just quietly smile and continue to accumulate gold. ___________________________________
James Turk is editor of the Freemarket Gold and Money Report and proprietor of GoldMoney.com, where this commentary first appeared. To receive his alerts by e-mail without charge, enroll here:
