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Why are the world’s Central Banks buying more gold?

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Action on the gold market has been a little flat over recent months, to say the least.

The price has moved up and down on a regular basis since the beginning of the year, but not dramatically up or dramatically down.

So what is going on?

Well a number of factors have contributed to gold’s lackluster performance.

First, buying in China and India has been down. This is significant, because between them they account for half of all gold jewelry, gold coins and gold bars purchased.

The Chinese economy has lost its oomph, so buyers there are less inclined to risk their cash by either investing in gold or buying physical gold. Quite simply, demand is down.

Meanwhile, demand in India has taken a hit this year both because of the falling value of the Rupee and the import duties that was placed on gold imports by the government.

I don’t anticipate much change in China, but in India the Rupee has gained in value against the US dollar recently, and that import duty has been withdrawn. So maybe we’ll see some action there in the last quarter.

As for all the individuals and fund managers who were buying up gold here in North America, their enthusiasm for the yellow stuff has faltered and almost come to a stop.

Those who thought gold prices were going to climb quickly, consistently and indefinitely are now scratching their heads and wondering what to do with their losses or their gains. Should they sell and cut their losses? Should they buy more gold and hope for the best?

All told, people generally don’t seem to know what to do, and are doing nothing. Which is why we are seeing ups and downs in gold prices, but no dramatic moves.

Against this backdrop, something else is going on.

Central Banks around the world are buying gold. In fact they have bought more gold in this quarter than they have at any time since the first half of 2009, over 3 years ago.

This is the kind of thing I watch for. I am less fussed by investors and gold bugs jumping in and out of the market. I am much more interested when Central Banks buy a lot of gold.

Why? Because they buy gold for the same reasons as I do…as a reserve against a rainy day. That’s why they are called reserves. It is wealth owned outside of the banking system.

For this reason, I’m watching gold a lot more carefully right now. If the central banks are buying gold in a hurry, they probably have a good reason.

And if they have a good reason to buy gold, we probably do too.

About the author: DH Kenrick is a student of world economics and a committed gold enthusiast. 

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