Central Banks are buying Gold and taking possession

GLD, SLV, XLF, UUP, GDX, AU, RGLD, AUY

Gold (NYSE:GLD) and Silver (NYSE:SLV) continue to keep things interesting in the global financial system.

Gold and silver continue their place against Fiat Currencies. Last Tuesday started quietly for precious metals, then the US Fed minutes were released and things fast.

Below is a look at the new developments concerning central banks and Gold.

Last week, the Financial Times (London) reported that central banks around the World pulled 635 tons of Gold from the Bank for International Settlements so far this year, that represents the largest withdrawal in more than a 10 yrs.

Last year, central banks added to deposits of Gold at the BIS (a Bank for central banks), as opposed to lending it directly to the private sector amid growing concerns over counter party risk.

The Big Q: why are central banks now taking possession of their Gold now?

The Big A: central banks are unimpressed with the low interest rates for lending their Gold, and perhaps they see more economic troubles ahead.

The chart below shows an interesting story of central banks and their relationship with Gold.

After several years of being net sellers of Gold, central banks are now net buyers of Gold, and the EuroZone central banks became net buyers of Gold in Y 2011, which has never occurred since the inception of the Euro in Y 1999.

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Aside from being net buyers of Gold, central banks have been stirring up financial markets (NYSE:XLF) with quantitative easing (QE) programs.

For example: as the US Federal Reserve injects more stimulus into the markets, the US Dollar (NYSE:UUP) weakens. Investors looking for a safe-haven against inflation and anything else that comes along, gravitate to Gold and Silver.

IIn May, during the Fed's QE-2, Gold reached a record high of 1557 oz, and Silver tapped at 50 oz.

Last Tuesday, the mention of more stimulus caused Gold to rise. Newly released Fed minutes reveal that some members are considering additional stimulus if economic growth fails to improve.

Gold popped on this news, and closed at a new high of 1562.30 oz Tuesday. Gold miners (NYSE:GDX) such as Yamana Gold (NYSE:AUY), AngloGold (NYSE:AU), and Royal Gold (NASDAQ:RGLD) finished higher, and broke out of trading ranges and continued their Bullish patterns.

It has only been a little over a month since QE-2 ended, and we are getting hints of more stimulus. You do not have to be a Gold Bug to have a reason to hold Gold in your portfolio.

A new study from Oxford Economics recommends holding at least 5% of all protfolio assets in Gold, and varying economic conditions, like QE-3, implies higher allocations for Gold. Stay tuned...

Paul A. Ebeling, Jnr.

 

Paul A. Ebeling, Jnr

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.