Wednesday, March 28, 2012

Is the UK Government about to Launch a Gold Buying Program?

During a speech on the budget, last week British Chancellor George Osborne caused a small uptick in the gold market with a comment that suggested the Bank of England might start stockpiling gold.  Osborne called for funds to add to "reserves".

The U.K. Treasury denied it was about gold, saying that the reference was to reserves in general, rather than gold specifically.

Financial observer Matthew Lynn in London isn't buying for a minute that the reserve reference wasn't about gold and he breaksdown what he suspects is really going on:
Osborne was onto something.

The developed world central banks should all be increasing their reserves dramatically. The best way would be by refilling their vaults with the precious metal.

In his speech, Osborne said that he planned to increase Britain’s reserves, something most developed countries have not worried about for the best part of three decades. They are certainly in a sorry state. For a major developed economy, the U.K.’s reserves are laughably tiny.

Under the previous prime minister, Gordon Brown, the country sold off a lot of its gold right at the bottom of the market. Its total reserves now amount to just $46 billion. That is up a bit from the $34 billion they stood at when the new government took office, mainly because of the increase in the value of its gold holdings and also the extra deposits committed to the International Monetary Fund.

But the U.K.’s hoard of gold and foreign currency is dwarfed by China’s reserves, which currently stand at a towering $3.18 trillion, as well as by Japan with $1.2 trillion, and by Saudi Arabia with $500 billion... the U.K. has no reserves worth speaking Osborne hinted, they need to think about raising them...

Most paper currencies are sinking fast. Reserves with the International Monetary Fund have no real secure value and the IMF’s quasi-currency, known as the Special Drawing Right, is made up of four funny-looking paper currencies rather than just one.

But reserves held in gold can be expected to grow in value every year. Indeed, cynically, by holding more gold central banks are insuring themselves against their own profligacy. They print money. They price of gold goes up. And if they hold a lot of the stuff in their vaults, they are the big winners from the rise in price. If you can pull it off — and there isn’t anything to stop you — that sounds like an easy way to make a living...

At the end of last year, official net purchases of gold started to rise dramatically. In the third quarter of 2011, central banks added 148.8 tonnes to their gold stocks, more than double the entire amount of government buying in 2010, according to the World Gold Council. Interestingly, the Greek central bank has been slowly adding to its holdings of gold, which would be sort of handy, should they happen to decide to re-introduce the drachmas one day.

But the next phase will be developed world central banks moving back into precious metal; the U.K., Germany, France, Switzerland and potentially the U.S. as well.

The U.K. has given the first hints that policy makers are at least thinking about it. Actual buying maybe some way off. And if they start, it will be done discreetly, otherwise the price will shoot up.

But when it starts to happen seriously, it will provide the bull market in gold with a whole new impetus.


  1. I recall seeing an Elliottwave chart showing central banks selling gold at lows and buying at highs. Ultimate contrarian indicator?

  2. Not only did Gordon Brown sell off a huge amount of our gold at the bottom of the market just over a decade ago, he pushed the market down first by pre-announcing sales.

    Before and during this depressing episode, Gordon Brown was advised by one Gavyn Davies, then a Chief Economist and managing director of Goldman Sachs.

    Davies' wife, Sue Nye, was Brown's private secretary and they are known to be a close, chummy bunch.

    Just sayin'.