Central Banks Are Buying Gold, Are you?

The World Gold Council have recently published their second quarter 2012 report. The report indicates that the demand for gold reached 990 tons for the second quarter of this year. This figure is down 7% from the same quarter in 2011, and down 10% below the previous quarter. Although weaker demand was mainly contributed by the jewelry and investment markets, demand from central banks around the the world has doubled since last year. Is this worth raising an eyebrow?

Up until now, 2012 was a lackluster year for gold, as its spot price was mainly locked in a trading range around $1,600/oz. We at Economic Reason believe that gold is in another consolidation period. However, as noted in the report, the lack of a confirmed up-trend has caused many to sell profits and hold on further gold purchases until the upward trend is re-confirmed.

Also worth noting is that individuals in the Eurozone have recently been increasing their gold holdings in light of the European economic crisis in an effort to maintain and preserve their capital.

What is interesting is the gold movement at the very top: why are central banks doubling their demand in gold when gold is still considered by many in the mainstream media as a barbaric relic without any intrinsic value? Rumors are already spreading that these banks are purchasing such great quantities of gold because their intention is to move gold from a Tier 3 to a Tier 1 asset. Or perhaps emerging countries are really progressing towards an independent monetary system backed by gold as stated in my previous article “The Petrodollar Collapse“?

Are we getting ahead of ourselves? As the report suggests, central bank demand is increasing in order to maintain a proportional allocation with their foreign exchange reserves. Is this simply a convenient truth?

Post your thoughts below.


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