I Think I'm Turning Japanese...

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Although the case for the latter would have been strengthened by recent financial turmoil, it was almost impossible to know with any certainty, said the Group. However, they noted that the vast majority of gold was still held by European central banks and the US Treasury, reflecting the international economic order of the late 1960s.

For gold to have a future as a reserve asset it needed those central banks which have little gold and a lot of foreign exchange to want to acquire gold, but these banks outside of Europe have not shown any signs of doing so. If these banks did not acquire gold, then the long-term trend for net official sector sales remained intact, said the VM Group.

CBGA III?

The Group felt that the CBGA agreement would almost certainly be renewed by or before September 2009.

Factors that were taken into consideration in this respect was the fact that the gold market had become accustomed to these sales pacts that arose from the need to cope with structural weakness in the market.

The report said that removing such a pact with the existence of many more actors on the buy-side and perhaps a smaller volume to sell, would boost gold's status as a reserve asset, giving holders greater flexibility in how they bought and sold it. But on the other hand, if the gold market sees a major downturn in the years during which a CBGA III might exist (2009-2014) then the absence thereof could exacerbate any bear market.

"Ultimately, it all might come down to how many central banks express an interest to sell, in particular the larger holders such as France and Italy. Germany's Bundesbank reiterated that it will not use any of its allocation during the current final year of CBGA II, so we are quite likely to again see sales far under 500t.

The report concluded that unless central banks were really changing their minds about gold's position within their reserves, this implied a slowdown rather than an ending to official sector reserves sales.

"This would ultimately translate into an almost certain renewal of the agreement by or before September 2009," said the VM Group."

While this sector's future behavior may still be unclear, that of today's global individual investor certainly is not in question. Given the background picture and its potential implications, the proverbial man in the proverbial street seeks to ensure that some gold is present in his basket of assets. Cash may be king, but gold is emperor to many. A favorite motto, frequently heard at metals workshops, has been "If you buy gold for the right reasons (i.e. not to make money, but to keep it) there is no such thing as the wrong time, or price." By all means, none of this implies that 90% of what you have ought to be in bullion. However, look at some of the above-mentioned central banks -stodgy, conservative, occasionally not very bright, but still hanging on to a few bars in the basement. All but Canada, of course. With our measly 3 tonnes in reserve, we trail behind....Bangladesh in gold holdings. O Canada..., Oh, Canada.