Tuesday, December 15, 2009

Bloomberg Continues Its War on Gold

In Gold Buying by Central Banks Signals Sell as Past Haunts Future, Bloomberg.com provides some factoids about years in which central banks were net buyers of gold followed by gold price declines:

Some of the biggest buyers of gold may be sending the strongest signal to sell it, if past performance is indicative of future results.

Central banks, holding about 18 percent of all gold ever mined, are expanding their reserves for the first time in a generation as a nine-year bull market drives prices to a record.

The banks will buy 13.8 million ounces (429 metric tons) this year, worth $15.5 billion, for the first net expansion in reserves since 1988, New York-based researcher CPM Group estimates. Gold fell 15 percent that year and took another 15 years to trade again at the same price as central banks from Switzerland to the U.K. cut their holdings. . .

“This is late in the game to be buying gold,” said Peter Morici, a professor of business at the University of Maryland in College Park and former economic adviser to the U.S. government. “Central banks are not known for their investment acumen. What it reflects is a lack of confidence in the U.S. economy and the long-term durability of the dollar as a store of value.”

Dr. Morici achieved a Bingo! Yes, the rise in the price of gold against all fiat currencies this decade reflects a lack of confidence in the durability of all paper currencies as stores of value.
EBR in general has no interest in the relative values of one paper currency vs. another. The flavor of this month appears to be that the Euro is a flawed currency, so the USD has been rising against it. Big whoop. The main point is that money-printing is the major policy tool both for our Fed and US and European Governments; while the European Central Bank is less "into" money-printing lately than the Fed, this is relative and the ECB traditionally holds lower-quality assets than the Fed.

To show you that I am not making up the political bias of the article, please make sure you have digested the above and consider reading the first part of the article, not just the above excerpts; then read the end of THE SAME article:

Central bank buying may support prices. The bull market of the 1970s, when gold rose from $35.17 at the end of 1969 to $512 by the end of 1979, was in part caused by central bank hoarding, according to Daniel Sacks, a money manager of the Investec Global Gold Fund at Investec Asset Management, which oversees about $47 billion.

“Central banks recognize the economic crisis could linger,” said William O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey, and former head of futures research for Merrill Lynch & Co. “Gold has assumed the front and center position as the alternative currency.”

The same writer and editor of the same article apparently found it so confusing to create a long writeup that they forgot their thesis was that central bank buying is a contrarian sell signal for gold. Now they take the obvious, logical position: it takes motivated buyers relative to sellers who don't want to sell to create rising prices. When large holders such as central banks don't want to sell, the supply-demand curve shifts. In addition, when they actually look to buy more, the balance of buying-selling pressure shifts further in favor of sellers; i.e., it favors higher prices all things being equal.

The financial markets are so opaque, one never knows, but the straightforward view is that gold remains in a structural bull market, governmental policy is pro-growth, pro-deficits, pro-money-printing, and quite tolerant of inflation, and that there are so many articles that are coming out with an obvious and poorly-reasoned anti-gold bias that no matter what happens to the gold price, we are nowhere near a manic top a la NASDAQ 1999-2000 or gold itself 1979-1980. My enthusiasm for gold investing increases every time I see this sort of article. Keep it up, bears. You have nothing to lose but your shorts.

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