Central banks continued to add to their gold reserves in August with three countries adding a total of 643,000 troy ounces to their reserves.

According to the Wall Street Journal, the largest central bank purchaser of gold during August was Thailand which purchased 300,000 troy ounces, bringing their total gold holdings to 4.4 million ounces. The Bolivian central bank purchased 225,000 ounces increasing their total reserves to 1.36 million ounces and the central bank of Russia purchased 118,000 ounces which increased total reserves to 27.2 million troy ounces.

After selling gold reserves for many years, central banks began purchasing gold around 2000. Over the past several years central banks have sharply accelerated their purchases of gold to diversify away from the U.S. dollar which is no longer considered to be a safe asset. China and Russia, large buyers of gold, have been particularly critical of U.S. monetary and fiscal policies and are actively seeking to reduce their reserve holdings of U.S. dollars.

Will central banks continue adding to their gold reserves? For some insight on this matter, consider the following facts.

In August Russian Prime Minister Putin said that the United States is not living within its means, shifting the weight of responsibility on other countries and in a way acting as a parasite. Putin also said that a new reserve currency is necessary to protect against a systemic malfunction of the U.S. Putin has reason to worry since Russia has almost half of its reserves in U.S. dollars. In 1998 Russia had gold reserves of 14.7 million ounces compared to 27.2 million ounces after its latest purchases. Despite the fact that the Russian central bank has the eight largest official gold holdings in the world, gold amounts to only 8.2% of total reserves.

China, which holds $1.2 trillion of U.S. treasury debt, has the most to lose from the continuous debasement of the U.S. dollar and has become harshly critical of U.S. economic policies. After the U.S. debt downgrade in August, China said that America must cure its addiction to debts and live within its means. China is actively seeking to diversify its reserves and reduce its holdings of U.S. dollars. The latest reports show total Chinese gold reserves at 1,054 tonnes compared to 395 tonnes in 1988. Gold holdings amount to only 1.6% of total Chinese reserves. China's 33.9 million ounces of gold is currently valued at only $54.2 billion. By comparison, the gold holdings of the SPDR Gold Shares ETF (GLD) total 39.9 million ounces valued at $65.6 billion. Expect China to add dramatically to its gold reserves in the future.

Gold purchases by central banks during 2011 are forecast to be 336 metric tonnes, approximately 13% of total yearly gold mine production. Central banks during the second quarter of 2011 purchased four times the amount of gold purchased during the comparable quarter of 2010. Given the fragile state of the world fiat money system, it is likely that central bank gold purchases could expand dramatically going forward.

Only 7 countries or institutions currently hold more than 1,000 tonnes of gold - the United States, Germany, the IMF, Italy, France, China and Switzerland.

Total official world gold holdings by central banks and the IMF currently total 30,707 tonnes, valued at approximately$1.6 trillion which, coincidentally, is the size of this year's budget deficit for the United States. Total gold holdings of the world's central banks amount to only a fraction of the value of paper currencies that have been exponentially created.

All of the gold mined throughout history totals only 178,000 tonnes or about 6 billion ounces valued at $9.6 trillion. Central bank holdings amount to only 17% of the total gold supply available.

Despite increasing gold prices, gold mine production has been stagnant. Most of the easy to mine, high grade ore deposits have already been exploited. New total yearly gold production adds only 1% per year to the existing supply of gold. Increasing demand and limited supply result in higher prices.

Only 34 central banks currently hold over 100 tonnes of gold and only 12 central banks or institutions hold more than 500 tonnes of gold.

Ironically, the United States, the most indebted nation in world history has decreased its gold reserves. In 1962, the United States owned 14,269 tonnes of gold or almost 39% of all gold held by central banks. By 1972, the United States held only 8,584 metric tonnes of gold. Currently, U.S. gold reserves allegedly total 8,134 tonnes but the amount remains in question since the government will not allow an independent audit of the actual amount held.

Considering the relatively small amount of gold held by central banks and the exponential increase in the creation of paper money, gold demand by central banks should increase dramatically in the future.