|Gold bar Wikimedia Commons image|
One would think the record price for gold would cause some profit taking by large institutions. Indeed, the media is trying to convince people that now is the time for individuals to take their profits on old jewelry and coins.
However, Bloomberg reported this week that central banks around the world, who were net sellers of gold a decade ago when it was a bargain, are now net buyers of gold, indicating that gold may be poised to reach $2000 an ounce:
In 2010, central banks became net buyers for the first time in two decades, adding 87 metric tons in official-sector purchases by countries including Bolivia, Sri Lanka and Mauritius, according to World Gold Council data. China, with more than $3 trillion in foreign-currency reserves, plans to set up new funds to invest in precious metals, Century Weekly reported this week. Russia purchased 8 tons of gold in the first quarter.
Bloomberg stated that the gold rush is primarily due to lack of confidence in the U.S. dollar and monetary policy by the Fed:
Prices reached a record 15 times this month on demand from investors seeking an alternative to the dollar after the currency slumped to the lowest since 2009, U.S. debt widened, and the Federal Reserve signaled April 27 that borrowing costs will remain near zero percent for an extended period…
… The U.S. Treasury Department projects the government could reach its debt ceiling of $14.3 trillion as soon as mid-May and run out of options for avoiding default by early July. The Fed has kept its benchmark rate between zero percent and 0.25 percent since December 2008 to help stimulate the economy, driving the dollar down 11 percent against a basket of six major currencies during the past year.
Francisco Blanch, the head of commodities research at Bank of America Merrill Lynch, said “Central banks in emerging markets may aim to hold 2 percent to 8 percent of their foreign-currency reserves in gold.” China currently keeps only 1.6% of its reserves in gold, but is reportedly planning to invest at least another trillion dollars in gold.
Given that there are no indications that the Federal Reserve is planning to change its monetary policy in the near term, experts expect that gold will continue to climb to new record highs because of a weakened dollar and increased demand for a stable store of wealth.