This must be more evidence of Bernanke’s “tradition.”
The Olympics may be over, but central banks around the world have begun a race to buy gold and are doing so at the highest level in decades. The World Gold Council recently announced that central banks officially bought 157.5 tonnes of gold, equivalent to just over 5 million ounces, from April to June of 2012. Not only is this the largest quarterly amount since central banks became net buyers in 2009 after more than 20 years of selling, it is 138% more than last year’s 2nd quarter of 66.2 tonnes. What’s most notable about this record gold purchase is that it occurred during a time when gold prices fell, Treasury bonds rose, and the U.S. Dollar gained against other currencies. In other words, foreign central banks are taking advantage of short term Dollar increases by strategically diversifying their worthless Dollar reserves for gold.
While such news has yet to make headlines within the financial media, it is another sign that foreign governments are losing faith in the Dollar—and this is only the beginning. Currently, the debt crisis in Europe has helped postpone the Dollar’s day of reckoning. Yet America’s debt problems are far worse than Europe’s. President Obama and Mitt Romney have both demonstrated their unwillingness to cut anything from Medicare and Social Security, which means they aren’t serious about reducing the deficit. And unlike Greece, America has its own printing press and will continue to inflate the money supply to help finance entitlement spending. As baby-boomers continue to retire, deficits will grow even more rapidly and the focus will shift west.
So if foreign central banks are willing to trade their Dollars for gold when the Dollar is rising, they will outrun Usain Bolt to buy gold when their Dollars begin collapsing in value. Foreign governments may not be ready to abandon the Dollar today, but as with Greece, things can and will change quickly.
Devin Roundtree received his M.A. in economics from the University of Detroit Mercy.