Observations on the market action and the implications of the gold and silver markets.
Saturday, December 03, 2005
Asian central banks likely to increase gold reserves
President Vladimir Putin holds a gold bar at a mineral resources exhibition in
Madagan in the Russian Far East, Nov. 22, 2005. Itar-Tass photo.
Russia, Argentina and South Africa have decided this month to increase their gold reserves, which reversed the selling trend in six years by world central banks, especially European ones.
It is only a question of time for Asian central banks to follow and buy in gold: they hold 2.6 trillion US dollars in foreign exchange reserves, and able to change more of them into gold as a hedge against US dollar falls.
Meanwhile, they don't like holding too much dollars, so one of the way outs is simply to have more gold.
True, but it will not be something to do "simply".
2.6 trillion US dollars of foreign exchange reserves can buy 5,200,000,000 billion ounces of gold (@ USD 500/oz). (USD 2.6 trillion divided by USD 500 = 5,200,000,000 ounces)
Total world new gold mine supply per year is about 2,500 tons or about 80,000,000 ounces. So if all new annual gold production was bought by all central banks, they would only be replacing about 1.5% of their government fiat token reserves with gold, for the first year of gold buying. (80,000,000 divided by 5,200,000,000,000 = 1.5)
New world gold production of 80,000,000 ounces at USD 500/oz equals USD 40,000,000,000, a small fraction of USD 2.6 trillion of cental bank reserves.
If just USD 40 billion tried to go into the physical gold market and started buying, there would be a price explosion. These central banks know they need to buy gold but they know they can not do it in any practical way that gets the job done. They are screwed.
And this is just central bank demand.
And then there are probably a couple or few central banks that may be thinking of beating the rest of the central banks to the physical gold buying.
Just another reason that the price of gold can become explosive.
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