Looks like govts. are increasingly moving into gold.

Govts. can support prices for at least as long as they increase purchases geometrically, which, operationally they can do without limit. It’s a political decision.

To get all the gold they want, govts. have to out bid the private sector, and then maybe each other as well.

That means when govt buying slows down, if it ever does, prices then fall to the private sector’s bid.

With precious few non hoarding uses for gold it’s all waste of human endeavor and a waste of all the other real resources that go into gold mining and refining, etc. But it’s all a very small % of world expenditure of real resources.

Bottom line, it’s another example of govt. ‘interference’ creating a distortion, but in this case the real resources expended- land, labor, capital, energy- are relatively small as a % of total resource consumption, and since gold can’t be eaten and isn’t used for shelter and clothing (ok, some ornamentation) the high price probably alters too few lives for the worse for a political backlash.

However, central bankers stuck in mythical inflations expectations theory with regards to the cause of inflation could react and cause problems that wouldn’t otherwise be there. I doubt the Fed falls into that category, but it’s not impossible.

Russia Buys 16 percent Of Global Gold Production

According to the Russian Central Bank, Russian gold reserves just hiked 1.1 million ounces in May. Given global mining production is just 6.8 million ounces a month, this represents 16.1% of monthly global mining production.

This is the largest one month purchase of gold by the Russian Central Bank, which has been buying gold at a rate of 250,000 ounces a month for the past three years, and comes just as Putin is pushing for a single world currency and last week revealed the currency’s first proof coin.

At the same time as Russia is quadrupling its gold purchases, Saudi Arabia just announced that it has more than doubled its gold holdings from 143 tonnes in the first quarter of 2008 to 322.9 tonnes. That’s 241,000 ounces a month — eerily similar to Russia’s purchases.

And nobody quite knows what China is doing right now, but they ain’t sellers. Between 2003 and 2009, China’s central bank bought an average of 76 tons of gold a year (185,000 ounces a month). The likelihood of China slowing its purchases is close to nil. and the likelihood of China letting Russia and Saudi Arabia get the better of it is negligible at best. Even if China is purchasing just 250,000 ounces a month, that would mean just thee central banks are sucking up 24% of global gold mine production. In all likelihood, it’s much higher.

If this trend continues, it’s going to have other central banks jumping on the bandwagon to buy gold — just as they jumped on the bandwagon to sell it in the 1990s — and will have a similar impact on the price. But in the opposite direction!



13 Responses

  1. I wonder whether the issue may not be the gold. It may not even be the labor and resources required to mine, refine, ship and store the gold. Perhaps the issue is the money used to buy the gold.

    What currencies do Russia, Saudi Arabia and China distribute when buying gold? Their own currencies? Are they actually increasing worldwide distribution and ownership of their currencies? If so, does this have more significance than gold ownership?

    Rodger Malcolm Mitchell

  2. [Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head…

    – Warren Buffett

  3. Wall Street Journal house liberal, Thomas Frank, had an interesting idea in January– The United States should take its 243 million ounces of gold reserves (equivalent of 3 years of global production) and put them on the market, all at once.

    One reason gold has been bid to its current stratospheric heights is because more and more investors and fund managers have signed on to this dark belief that America’s judgment day has finally come…
    Were the administration to get started on the great gold dump, however, we’d come to a different judgment day very quickly. When the massively inflated price of that metal collapsed, it would probably take with it a hefty chunk of the portfolios of tea-party types, survivalists, Birchers, dittoheads, Objectivists and almost every imaginable species of secular end-timer.

    Achieving such an effect might not even require selling the gold, either: The government could conceivably collapse the price merely by implying that it intended to sell the stuff… And so, in an irony worthy of Oscar Wilde, it would be the gold-investing contingent of the right who would discover that they had risked their fortunes on the whim of the very government they distrust and despise.

    1. It’s not even going to take that. When the public enters a market expecting to make a killing, and its hyped in the media, the distribution phase is underway.

  4. Beowulf, a move like that could be seen as the Treasury being desperate for cash (yes,.. ridiculous) and the move might backfire. Also, there are many out there that still believe the dollar is somehow backed by gold or somehow reinforced by gold holdings and dumping all that gold could cause them to panic and buy more gold as the ‘backing’ would now be gone. As Warren says, who really cares.. best to leave it alone.

    1. Oh I agree, the world has enough irrational things to worry about to add another one. But I do think its an amusing idea. People who think gold is a reliable and stable store of wealth apparently weren’t around when the price of gold dropped from $800 to $300 in the early 80’s.

      If you follow the link, even Frank admits his plan for Uncle Sam to crash the gold market is a bad idea. The government would inevitably bail out gold investors.

  5. Selling CB gold to the public at this time would aggrevate deflationary pressures. Although I wouldn’t generally advocate it, but gold is a buffer stock, and it can be used by central banks to conduct fiscal policy. A CB buying gold with its sovereign currency is the same as a government spending its sovereign currency on some other widget it buys from the non-government sector. It has the effect of increasing net financial assets for the non-government sector. Even if gold is useless, the CB can bypass the Treasury on fiscal policy by buying gold.

    From Mandatory Readings:

    The government has the same pricing options with its money of any monopoly supplier of an absolute necessity. An analogy can be drawn, for example, with an electric utility monopoly although taxes give the currency monopolist a tool to regulate demand that the electric utility monopolist does not have.

    How does the monopolist price his product? There are two options:

    1. Set price, p, and let quantity, q, float, or
    2. Set q and let p float.

    The first option is generally preferred, with a gold standard or the proposed ELR program two examples of using the first option.


    So, the CB can set the price of gold (p) high enough to increase spending (q) to augment aggregate demand.

    1. Zaid, thanks for linking. It’s been a while since I read that. <an, we'd live in a better world if this point was universally understood:

      Unemployment can therefore be summarized as follows:

      Involuntary unemployment is evidence that the desired H(nfa) of the private sector exceeds the actual H(nfa) allowed by government fiscal policy.

      To be blunt, involuntary unemployment exists because the federal budget deficit is too small.

      Furthermore, if an agent wants to sell any real goods, and thereby increase his H(nfa), this too can only be accommodated by another agent decreasing his H(nfa). If the desired H(nfa) is greater than the actual H(nfa), the evidence is involuntary inventory accumulation and a contractionary bias.

      1. No doubt in my mind that the ELR proposal is superior to gold as a buffer stock, but if all other measures fail, Bernanke is likely to opt for buying gold. He insinuated it in one of his speeches a few years back.

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