Foreign central banks are concerned that their major reserve currency, the US dollar is losing value. Many of them are looking toward gold since it provides stability and liquidity.
The following chart shows the amount of dollars held by the central banks in reserve. Note that the graph is heading south! Not good for the dollar but very good for gold.
Since last July, the U.S. dollar index (the value of the U.S. dollar compared to six major world currencies) has lost almost six percent. Plus the euro has fallen as well and the central banks have limited choices to consider, making gold all the more important to them.
Central banks are not very transparent with their gold dealings and we usually find out well after the fact. Since central banks of China, Russia, Saudi Arabia, and Korea hold less than 10% of their reserves in gold bullion, they stand ready to add a considerable amount to their reserves. China holds only 1.7% and they also hold the largest amount of foreign reserve currencies, so their participation alone will be very significant in the continued rise in the price of gold.
Since there is only a limited amount of gold bullion and more central banks chasing it, gold’s price must continue to rise.
Here is one more informative chart showing the rise in the price of gold and how it correlates to the rise in central bank financial assets.
There is quite a bit of material from Jim Sinclair in the past few days and it’s all good and worth reading. Pay special attention to his comments from October 8th:
In The News Today – October 8, 2012, at 4:07 pm – by Jim Sinclair