By Michael Lombardi, MBA for Profit Confidential
In these pages, I have written extensively on how central banks will ultimately be the ones who drive gold bullion prices much higher. The phenomena of these banks getting back into gold (after they were net sellers for years) started in mid-2009.
The chart below clearly shows the rise in gold bullion reserves held by central banks across the global economy; its trend is quite impressive, even for a gold bug like me.
Central banks’ gold reserves have increased about 6.4% since the first quarter of 2008 to the first quarter of 2013. (Source: World Gold Council, last accessed September 6, 2013.) While on the surface that sounds like a small number, the actual increase is 1,717 tonnes of gold—equal to about 64% of the total amount of gold produced annually.
And the buying continues. In the second quarter of this year, central banks bought more gold. They purchased 71 tonnes of the yellow metal. (Source: World Gold Council, August 15, 2013.)
Why are these banks running towards gold bullion? It’s because they are getting out of U.S. dollars as their reserve currency. The chart below tells that story.
This chart is something gold bears refuse to acknowledge. It shows the percentage change from a year ago in U.S. dollar reserves at central banks around the world. You can see how, since 2007, the U.S. dollar has become less of a reserve currency for these banks.
The actions of the central banks, in buying more gold bullion and getting away from the U.S. dollar as their reserve currency, speaks louder than words—and the two charts above just give me more ammunition to be bullish on gold bullion.
Michael’s Personal Notes:
The U.S. national debt has increased significantly over the last few years, especially after the credit crisis struck the U.S. economy.
To stop the economy from totally collapsing, the U.S. government incurred several trillion-dollar budget deficits in a row as it spent to revive the economy. As yearly budget deficits piled on, the U.S. national debt rose. Today, the U.S. economy has the biggest debt in monetary terms than any other country in the global economy. In fact, if you add together the national debt of Greece, Spain, Portugal, and Japan, collectively, their debts are less than the national debt of the U.S. economy.
What happens next?
At present, the U.S. government is making payments on its old debt by simply borrowing more debt. Hands down, this is the biggest Ponzi scheme in play. But as I have written before in these pages, our national debt-to-gross domestic product (GDP) is only 105%. In Japan, the national debt-to-GDP is 205%. Hence, if we follow Japan’s example, our debt could double from here.
The U.S. government should hit its debt limit in October. And Congress will increase that debt limit as it always does.
Eventually, the only way to reduce the national debt, especially if interest rates rise, is to raise taxes. But it is a double-edged sword. Raise taxes and you stifle the U.S. economy, as higher taxes negatively affect consumer spending. Don’t raise taxes and you still have a problem with a mounting national debt.
Will the U.S. come out with some law that if a group of citizens or a corporation has a certain amount of cash, they will get a special tax assessment on capital? This action makes more sense than an across-the-board tax increase.
It happened in Cyprus. Now we hear something similar is being done in Poland. To help its national debt situation, the Polish government has decided on reforms that move bond assets from private to state funds. Private pension funds are saying the move is unconstitutional. Crazy, but true; this is what is happening in Poland. (Source: Reuters, September 4, 2013.)
In the case of the U.S., I don’t think we have to worry about special tax assessments right now. They will be a thing of the future, not today. If we follow Japan’s route—and it looks like we are—we can add another $15.0 trillion in debt before the government gets desperate (save and except sharply higher interest rates or a total collapse in the value of the U.S. dollar).
What He Said:
“I’ve been writing to my readers for the past two years claiming the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in Profit Confidential, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.