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Central Banks Become Net Buyers Of Gold For First Time Since 1987
international monetary fundBy Patrick A. Heller, Market Update
August 24, 2009
international monetary fund

One of the most respected analysts of gold activity, GFMS (formerly known as Gold Fields Mineral Services), reported last month that "Central banks' swing into net demand territory during the second quarter of 2009 was something of an exception."

The exception is that this is the first time that central banks, in total, have purchased more gold than they have sold since 1987!

However, GFMS went on to say, "We do not believe that this heralds a sustained shift by the official sector from being a net seller to a net buyer. This is above all the case over the next two to three years due to the very high probability that the IMF will dispose of 403 tons of gold."

In its latest report on gold demand and supply statistics, GFMS refused to include central bank gold purchases as part of demand. Paraphrasing their explanation, they said that since central banks are not normally net buyers of gold, they refuse to include it as an element of demand.

Part of the GFMS thought process is that China will sharply curtail its gold purchases. It said, "Nevertheless, any direct, large scale purchases from China in the open market would seem very unlikely . . . . instead of more visible and highly sensitive transactions in the international market, we may see further discreet and relatively modest official purchases in the local market."

Though GFMS is considered to be among the best sources of information on gold supply and demand, I think their current analysis on central bank purchases is contradicted by the facts.

I can just about guarantee than any IMF gold sale that might (and it is still not a "for sure" event) occur will be completely absorbed by other central banks. China has not only stated that it was willing to purchase the entire 403 tons of IMF gold, but it was actually willing to purchase the entire IMF 3,200+ ton gold holdings. This is absolutely a statement of a large scale purchase that would be visible and would not be either discreet or relatively modest. The only part of the GFMS analysis that would be correct is if China did purchase the IMF gold, it would not be a transaction on the "open market."

France, which had been the largest seller of central bank gold over the past several years, has stated that it will no longer sell gold. Germany has also stated that it will not sell gold. Since Switzerland made it clear that it would not sell any more gold reserves to help out the U.S. government, the U.S. government has retaliated against the huge Swiss bank UBS seeking records about the bank's American customers (of course, this timing could be coincidental).

In its latest monthly report released last week, Russia's central bank disclosed that it had acquired 600,000 ounces (18.7 tons) of gold from late June to late July. It has purchased gold every month for well over a year. China's buyers have been detected making some purchases, which GFMS' analysts failed to note.

In my opinion, central bank gold sales in the coming few years, even if the IMF gold sale does occur, will be more than offset by rising central bank purchases. As such, that means that the GFMS statistics for gold demand will continue to be understated in the coming years - as has been the case every year since at least 2003.

Last week, the Gold Anti Trust Action Committee (GATA) filed an appeal to the Federal Reserve's response to its Freedom of Information Act (FOIA) request seeking information on the Fed's involvement with gold swaps.

The appeal goes after the Fed for several different reasons. First, the Fed identified 137 pages of documents for which it claimed an exemption from disclosure. However, the Fed did not identify the reason for the exemption for each specific document as had been specifically requested in the FOIA request.

Second, the Fed turned over 173 pages of documents, which were represented as being released in their totality. However, there are several sections of apparent gaps where data has been omitted (redacted). Since the Federal Reserve stated that the documents were released in full, GATA has requested that the full documents now be released.

Third, this was GATA's second FOIA request to the Federal Reserve on the issue of gold swaps. The 173 pages of documents received for the 2009 FOIA request all pre-dated the 2007 FOIA request, which means they should have been released in the response to the earlier FOIA request. This establishes a likelihood that the Federal Reserve has failed to adequately search or disclose relevant documents. Further, the Fed response admitted that it had copies of relevant records that originally appeared on the Treasury Department Web site, but failed to include them in its response.

Fourth, a simple GATA search of the Federal Reserve website turned up a document on gold swaps that was not included among either the disclosed documents or a document that was listed as exempt from disclosure.

Fifth, one of the reasons generally cited for not disclosing information was that it would reveal trade secrets or commercial or financial information. GATA pointed out that the relationship between the Federal Reserve and the US government gold supply is a matter of public trust, and is not a private commercial or financial relationship. Moreover, whatever relationship exists between the Fed and the US government gold holdings does not involve "trade secrets."

Whatever happens with the appeal, the Federal Reserve looks to be either illegally hiding something or incompetent (or both).

On last week's discussion about the risk of the U.S. government seizing private retirement accounts, including precious metals IRA accounts, there were some comments posted to the effect that "it could never happen."

Unfortunately, the risks of such an event are significant. First, you have to understand that it has already happened - elsewhere - in Argentina in 2008. Despite the uproar at the time, that government did not fall. Besides the U.S., a handful of other countries are currently investigating nationalizing their private retirement systems.

As unpopular as such a political move might be, think how it would be sold to the American citizens. In Professor Ghilarducci's proposal to the Congressional committee, she suggested making the initial program voluntary. To make it enticing, she suggested converting private retirement accounts using their values from near their recent past peak instead of current much lower levels. I imagine that a lot of citizens would jump at the chance to have the value of their retirement accounts increased by 50 percent to 100 percent over current levels by converting them into U.S. government bonds (which are guaranteed never to fall in value, as measured in US dollars) paying 3 percent.

The income tax and Social Security programs did not start out as the huge burdens they are today. If the U.S. government were to go after private retirement accounts, I would expect this to also start out on a smaller scale than what it would be in 10-20 years.

President Franklin Roosevelt's calling in of privately held gold in 1933 was another event that most people would have thought "it could never happen." In my judgment, there are just too many trillions of dollars of assets in private retirement accounts for a cash flow-starved federal government to leave alone.



Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes Liberty's Outlook, the company's monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com.





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