Why Is Central Bank Buying Of Gold So Important?

Thursday, February 21, 2019
By Paul Martin

By Avi Gilburt
GoldSeek.com
Thursday, 21 February 2019

There is an old Yiddish expression called a bubbe meise (pronounced my-seh). I guess the closest English interpretation of this expression would be a grandmother’s tale, or in the common vernacular, an old-wives’ tale.

Of late, I am seeing a bubbe meise about the importance of central bank buying of gold, and it is making its rounds on websites all over the internet.

We have been hearing for many years about how gold is supposed to soar because countries and central banks are buying the precious metal. Most of the fundamentalists in this market are convinced that this is a bullish signal. In fact, one article I read explained that central bank buying “is significant, as central banks are the ‘smart money’ given their influence on global economics and access to non-public information.”

And, all I can think is that this writer does not know their history.

All we heard between 2011 to 2014 was how bullish the gold market was because China and India were buying huge amounts of gold. Yet, gold topped at the time when central banks began their huge buying spree in 2011 and continued down for years during this buying spree. “Smart money” indeed.

So, unfortunately, the facts do not support the commonly accepted proposition which seems to be making the rounds. In fact, historically, it is more common to see countries selling their gold at the bottom rather than buying.

From 1999-2002, Great Britain sold about half of its gold reserves. But guess what happened after the sales? Yes, gold began its parabolic climb from just below $300 an ounce to over $1,900 within nine years. In fact, that bottom in gold became dubbed the “Brown Bottom,” named after Gordon Brown, the U.K. chancellor of the exchequer, who made the decision to sell the gold at that time.

You see, governments are usually the last actors within a sentiment trend. Think about it. Aren’t governments enacting new laws to protect investors at the end of bear markets — after all the damage has already been done? So, it is not unreasonable to believe that governments would be the last sellers to the market to conclude a bear market. Moreover, it is common to see them as buyers when markets are near some form of high, such as they seem to have done during 2011-2014. And this is why I was awaiting news of a government selling its gold reserves to represent the culmination of a selling trend several years ago.

Back in 2015, I read an article noting that Venezuela could be selling more than 3 million ounces of gold reserves before year-end. The country had more than $5 billion in maturing debt and interest payments due before year-end without the ability to repay it.

While the 12 million ounces of gold sold by Great Britain at the “Brown Bottom” is clearly more than the 3 million ounces that Venezuela was considering selling, recognize that Great Britain’s proceeds from its sale were estimated at around $3.4 billion, whereas the Venezuela sale would have likely netted around $3 billion.

Additionally, back in 2015, the major players within the gold market turned bearish. At September’s Denver Gold Forum in 2015, a panel of gold-industry experts came to a consensus that gold is still overvalued and would likely fall below $1,000, perhaps to around $800. Moreover, at the LBMA/LPPM gold conference in Vienna, an expert panel discussion on gold came up with almost an identical consensus. The panel also expected that gold will drop to below $1,000, and perhaps to $800 or less.

Again, more “smart money?”

In fact, based upon the sentiment exhibited in the media, as well as in my charts, I noted at the time:

These recent events somewhat bolster my argument that the bottom to this market may be closer than most believe, and it may not drop as deep as many believe. As the next, and final, decline takes hold, we will be able to pinpoint the target more accurately. But I have been having strong doubts about whether gold will actually break below $1,000 with so many believing it is almost a certainty. Remember what happened back in 2011 when almost everyone (other than yours truly) believed that it was a virtual certainty that gold was going to exceed $2,000? As the late Yogi Berra would say, this might be “deja vu all over again.”

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