Why central banks hold 25,000 tons gold reserves

With the help of archive.org, the following was saved from the old goldtraderasia.com website, for anyone who might be looking for it.

March 20, 2009

Commodity Online
MUMBAI: With the safe haven status of gold rising, it has become very important to be very careful while buying gold.

According to a press note from Bud Blair of Gold Tree Online, with gold prices at an all-time high, gold buying is big business and investors need to pay attention. Investors should look to gold to increase their position in a down global economy.

Analysts are expecting the gold industry output to continue its decline since there haven’t been any significant gold mine discoveries in recent years.

Estimates are out that gold will trade between $900 to $1,200 per ounce range throughout the next several years, both because of the industry’s low output and flight-to-quality demand. Most other asset classes have taken mighty blows from the global recession.

In the physical sector, all falls in gold jewellery buying obviously gets picked up by higher investment demand in the low-cost gold-backed exchange-traded funds (ETFs).

Gold ETFs get listed on stock exchanges. Everyday investors can trade in gold bullion without taking physical delivery.

ETF sponsors purchase a concurrent amount of physical gold which gets kept in bank vaults. ETFs have seen a surge in investment money as the value of the underlying commodity has risen.

CEO Richard O’Brien of Newmont Mining Corp, the world’s second largest gold producer, says, “I will be surprised to see gold on average below $900 this year. Inflation is something the world has to deal with. Jewellery demand will go up and down, but overall, the burgeoning population in China and India will, over time, continue to drive the demand for jewelry, and I think that demand will come back.”

Part of the concern about gold prices lies in the fact that central banks around the world have approximately 25,000 tons of gold held in reserves, as they have traditionally hoarded gold to maintain the value of their currency.

If they choose to sell just a small fraction of that on the open market, gold prices would crash, and investors holding gold would be crushed.

Something like this happened 1998, but since then central banks have agreed upon sales quotas so that gold-dumping and the subsequent price crashing would be avoided.

Serious investors should look to gold stocks and instruments now, more than ever.