As Retail Sells, Central Banks Wave Gold In With Both Hands

Tyler Durden's picture

As recent entrants in the gold market watched paralyzed in fear as gold tumbled by over $100 on the last FOMC day, on the idiotic notion that Ben Bernanke will no longer ease (oh we will, only after Iran is glassified, and not before Obama is confident he has the election down pat), resulting in pervasive sell stop orders getting hit, others were buying. Which others? The same ones whose only response to a downtick in the market is to proceed with more CTRL+P: the central banks. FT reports that the recent drop in gold has triggered large purchases of bullion by central banks in recent weeks. "The buying activity highlights the trend among central banks in emerging economies to buy gold, even as some western investors are losing patience with the metal. Gold prices have dropped 13.8 per cent from a nominal record high of $1,920 a troy ounce reached in September, and on Friday were trading at $1,655.60." Well, as we said a few days ago, "In conclusion we wish to say - thank you Chairman for the firesale in physical precious metals. We, and certainly China, thank you from the bottom of our hearts." Once again, we were more or less correct. And since past is prologue, we now expect any day to see a headline from the PBOC informing the world that the bank has quietly added a few hundred tons of the yellow metal since the last such public announcement in 2009: a catalyst which will quickly send it over recent record highs.

More on what was perfectly obvious to most except the propaganda pushers:

The Bank for International Settlements, which acts on behalf of central banks, has been buying significant quantities of gold on the international market amid falling prices, traders said.

 

According to several estimates, the BIS bought 4-6 tonnes of gold, worth roughly $250m-$300m at current prices, in the over-the-counter physical market last week, with purchases particularly strong at the end of the week. The total purchases over the past three or four weeks were likely to be as much as double that, the traders added.

 

In a note to clients this week, Credit Suisse referred to “aggressive central bank buying seen last Friday”.

Of course, central banks are well aware what they are doing. In fact, they have been buying up gold pretty much non-stop in the past few years.

As a group, they made their largest purchases of gold in more than four decades last year, led by emerging economies such as Mexico, Russia and South Korea intent on diversifying their dollar-heavy foreign exchange reserves. The World Gold Council has also pointed to the possibility of significant unreported purchases by China at the end of last year.

 

At the same time, European central banks have all but halted a run of large sales.

 

“Central banks have definitely been looking at gold as an asset class much more closely ever since European central banks stopped selling,” a senior gold banker said. “There has been a huge interest."

 

While some countries, such as Russia, China or the Philippines, have traditionally accumulated gold produced by their domestic mining industry, others use the BIS as an agent to carry out purchases and sales on their behalf, preserving anonymity.

 

The central bank buying comes as gold prices have slid in the past three weeks as strong economic data from the US has lowered investors’ expectations of quantitative easing by the Federal Reserve and made other investments, such as equities, appear more attractive.

The irony is that as has been pointed out repeatedly, gold will ultimately do well both in extreme deflation and inflation cases. And anyone who believes the Fed has the situation balanced properly, even as the global liquidity providing machine swings to ever greater exponential extremes, well, they likely also believed Bernanke when he told Maria Bartiromo that a home price decline is a "pretty unlikely possibility... we have never had a decline of house prices on a nationwide basis." And if it wasn't for Bernanke's endless bailouts, they would all be broke now.