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Why are Central banks buying gold?

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Prashanth Perumal posted on Fri, Mar 8 2013 8:59 AM

Here is the news:

Why exactly are Centra banks doing this? What I really don't get is, if central banks TRULY believed that they can bring the status of money to printed paper through legal tender laws, why would they even care about holding gold?

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Because obviously they believe that some of their assets valued in fiat currency or some of the debts owed in fiat currencies are too risky so they hedge their bets against inflation, just like any investor would.

They can force the citizens to trade in their designated currency but they don't have to follow the same rules

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Bogart replied on Fri, Mar 8 2013 10:05 AM

The upper case word says it all.  These central banks are becoming increasingly skeptical of the US Dollar, Euro and Yen. 

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Bogart replied on Fri, Mar 8 2013 10:07 AM

Also don't forget that these central banks are storing trillions of dollars in US Treasuries, Japanese Bonds and EU Bonds at stupidly low interest rates.  They know that if there is some sort of a default that their populations will want their heads, so they are hedging their bets and trying to keep away from the chopping block.

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If their fiat is ever repudiated, the gold would stand as backing for a new currency, I suppose.

Autarchy: rule of the self by the self; the act of self ruling.
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Kakugo replied on Fri, Mar 8 2013 11:09 AM

The reasons are not exactly conspiracy theory material.

Look at who's buying gold right now: Russia, South Korea, China, Brazil... None of them has what's commonly called a "reserve" currency. They have to rely on US dollars, Japanese yen, British pounds and euro in that sector. And they own a lot of them.

Don't think for a minute central bankers really believe their public act of "keeping inflation at 2%", "fighting unemployment" and being nigh on all-powerful. This act is for consumption by gullible investors and braindead voters. When the US Federal Reserve sent its own money supply in the stratosphere overnight to save member banks, Central Bankers knew they were seeing the beginning of an inflationary period or, as it's now termed, a "currency war".

A country like Russia holds huge foreign currency reserves. Her assets are damaged by inflationary politics almost as much as those held by a private citizen. Each euro the Russian Central Bank has been holding in her reserves since 2008 is now worth about 17% less. The same holds true for the ever increasing amounts of Western bonds: right now they are going through a price bubble but there are so many of them around values are bound to come down (and hence interests are bound to go up) pretty soon. In short the traditional reserve assets (currency and bonds) are being seen as increasingly less reliable.

This is leading central banks to a scramble to differentiate. Why? Because central banks, especially those belonging to countries with pegged or semi-pegged currencies, need assets they can sell quickly if their own currencies come under attack. Westerners have short memories, but people in Asia remember very well what happened to the South Korean won and the Thai baht in 1997. Also healthy balance sheets (like the ones China and Japan have) allow for much increased political and economic leverage at worldwide level. Have you ever wondered why the IMF and the World Bank have never successfully bullied China? That's your answer.

Chinese officials in particular seem to be very worried about Western monetary policies. They have a pegged currency and inflation is not only becoming a serious concern (in real life figures it's over 10%) but analysts are beginning to see through the smoke and mirrors and see a huge chunk of China's phenomenal growth is inflation fueled, not unlike South Korea in the '70s. To make things worse they sit on enormous amounts of foreign currencies and securities which become increasingly worthless with every passing day.

That's why they are turning to hard assets. Gold is only part of the picture. China is also buying large quantities of raw materials (chiefly metals like copper and long conservation foodstuff like rice), ostensibly to build "strategic reserves" but really as a diversification of their assets. In short they are spending their dollars and euro on useful stuff while they are still worth something. The Chinese are also starting to spend serious money on their large but unwieldy and obsolete military: again they are spending money while it's still worth something and are gaining assets they may need some day.

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