Pierre Lassonde, who used to be Chairman of the World Gold Council, offered some interesting observations to Eric King recently. As it turns out, part of what’s held gold’s price up in recent months has been, of all things, central bank accumulation. Is that because they want more gold (especially in light of its elevated reserve status) or because a dramatic drop might trigger other actions, such as a strong rally in the dollar?
While some dollar strength is good, a major rally would unsettle world markets and put a strain on already struggling international trading. Some of the facts from Lassonde:
- Global gold demand for the last quarter down 7% (only 1% in value though)
- Central bank buying reached a record of 157.5 tonnes for the quarter (16% of global demand)
It’s hard to know bankers’ motives, as we’ve studied in the past. But this is an interesting turn that needs further watching. Investor Alert reported on this as well, with some interesting observations regarding China and India.
Related to this is the recent CME press release that “announced it has extended the range of eligible collateral types to include gold bullion.” This is precipitated by a drop in euro value, meaning that collateral in the form of euros has diminished. In fact, according to Zero Hedge, it may have dropped as much as 1/3rd in value.
It appears that the world banks may be moving toward a “gold is cash” position, or are at least becoming more open about it. We mentioned before that the FED and FDIC have accepted gold as a tier I holding, meaning its value can now be counted at 100% for collateral. With changes like this occurring, we should expect gold demand to increase in the near future. Doug Hornig mentions:
That means that banks may not only replace a portion of their existing paper with bullion, but may use it to meet some of the extra 2% as well.
In addition, this vote of confidence from the highest monetary authorities gives further impetus to the remonetization of gold.
We’ll leave you with some reflection from Chuck Butler, senior V.P. of world makets at EverBank. His discussion on deflation vs. inflation focuses on “price inflation/deflation,” so can be a bit confusing. Then he mixes “real inflation” into the equation, which could further confuse listeners. Just be aware that his discussion on this particular aspect isn’t as clear as it could be.
And, of course, we disagree with his thoughts on deflation. But he’s no dummy, and we’d be foolish to ignore his comments.
For your prosperity,
J. Keith Johnson
The Gold Informant