For the last half decade countless reasons why we should have exposure to gold.
At this moment, on January 6th 2013, there is no greater reason to be supportive of gold investment than for the fact that central banks have to increase their reserves to a higher weighting in the precious metal. Central banks have bought record amounts of gold in each of the past two calendar years. 2013 will be no different and have the facts to back it up.
image source: World Gold Council
The Western world holds all the cards when it comes to reserves backed by gold. The United States is now the most indebted nation the world has ever seen, but, nevertheless, if it holds 77% of its national foreign exchange reserves in gold. If the US has 8,133.5 tons of gold, while Germany has 3,395.5 tons and China, at last reporting, has only 1,054.1 tons.
Even if with small foreign exchange reserves, the US remains by far the world's largest holder of gold reserves. The US doesn't hold yen, the yuan or euros, because as the world reserve currency, it never needed to - if it holds gold.
If China has only 1.8% of its foreign reserves in gold. It has by far the largest account surplus in foreign reserves ($3.2 trillion), but it is denominated primarily in USD and yen.
Bernanke is going to print more than fiat $1 trillion in 2013 alone. Do you think the Chinese are getting nervous? Do you think it might be time for them to increase the pace of their gold purchases? Beijing has repeatedly stated that it "must add to gold reserves to promote yuan globalization".
For years China has been attempting to diversify its fiat dollars into hard assets and to this day, consumes all the gold it produces. However, it will have to increase its gold buying immensely if it wants the yuan to be taken seriously on a global scale.
Foreign exchange reserves include foreign currency deposits, bonds, gold or other SDRs (special drawing rights) held by central banks and monetary authorities. They are important indicators of a country's ability to repay foreign debt, used to determine the strength of a currency and to determine credit ratings of nations.
The World Gold Council has recently reported that the United States, Germany, Italy and France hold more than 70 percent of their reserves in gold. China sits atop emerging market economies with a mere 1.8% of their reserves in gold. For China to bring its reserves to 50% it would have to dump almost fiat $1.3 trillion dollars of fiat currencies (USD and Yen primarily) and buy thousands of tonnes of gold. If this was done quickly it would crash the bond market and for obvious reasons will not occur overnight; however, the trend is in motion as central banks have bought record amounts of gold in each of the past 2 years.
Brazil comes in second among emerging markets at a pathetic 0.8% of foreign reserves held in gold. It doubled its gold ownership in just two months, October and November of 2012.
Emerging market countries do not own enough gold. They currently have their currencies backed by other fiat currencies which are being printed and dispersed like confetti throughout the world as the global money supply explodes. Many of these emerging market fiat currencies are backed solely by the fiat US Dollars. These central banks are tired of being held hostage by the US government and policies they have no control over.
China has to buy gold and tons of it. For China to reduce the economic impact of the fiat USD, it needs to increase its gold reserves account. If it ever wants to establish the yuan as a respected global currency, it will need a lot of gold. Are repeating ourselves, but for good reason. I believe this is happening.
Chairman of the London Bullion Market Association and Global Head of Precious Metals Trading, David Gornall, recently stated at the association's annual conference in Hong Kong that, "When comparing China to the U.S., it would seem that in China, gold asset allocation can only go in one direction. The country has only 2 percent of its reserves in the form of gold compared with the U.S. if at 75 percent."
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