Is Central Bank Buying Just a Driving Force Behind Gold or Much, Much More? 

Julian Phillips

Prior to 2009, central banks were selling gold to support the establishment of the euro. Since then, they have become net buyers of gold and are now a driving force behind the gold price.

Emerging nations such as Russia, India, Mexico, Colombia, South Korea, the Philippines and others are strong bullion buyers; their aim is to diversify away from the US dollar and other leading world currencies. They buy gold as a counter weight to those currencies

They are buying, and European central banks have stopped selling, because gold is an important reserve asset and a counterbalance to swings in the US dollar. There’s more to it than that, however. From 1979 to 2005 gold hovered around $300 per ounce. Now, at $1,600 per ounce, it is 5.5 times higher, but the dollar is not 5.5 times lower than other currencies. Gold has risen in all currencies including the euro.

The emerging world is as aware of gold's value in their reserves as are the developed world's central banks, and are doing something about it before there are potentially devastating developments in the global monetary system.

Governments of the developed world see that their 40-year experiment with unbacked paper currency is coming to an end. They see unbelievable national debt levels and sinking confidence in both the dollar and the euro. They know what can save not only them but also the world's leading commercial banks: gold.

Developed world central and commercial banks realize that however much they dislike the discipline of gold, it will allow them to harness a confidence that currencies are failing to do. Gold is also facilitating loans and liquidity that goes far beyond its price.

The structural benefits of gold are clear, and sidelining it from the monetary system is a dangerous handicap for the monetary system.

source: Gold Eagle