Central Bankers Choose Gold?

In 2009 I wrote an article (http://www.kitco.com/ind/Potter/nov042009.html) about the significance of the Bank of India's purchase of 200 tons of gold from the IMF.  After decades of being net sellers, it seemed that collectively, central banks were on the verge of becoming net buyers of gold.  Despite long dated conventional wisdom to the contrary, central banks did indeed buy more gold than they sold the following year (2010).

According to the World Gold Council's 2011 First Quarter report, "The latest data reported by the IMF suggests that central banks remained net buyers of gold through February of 2011 as a major shift in behavior among central banks continues to unfold."  The report goes on to state that European central banks have simply lost their "appetite" for exchanging valuable gold reserves for paper money and emerging market central banks are buying gold to diversify their growing US dollar reserves (the result of excess, newly created dollars flowing abroad).  The most striking example of this is the recently reported purchase by the Central Bank of Mexico (http://www.ft.com/cms/s/0/cbc02e10-7637-11e0-b4f7-00144feabdc0.html#axzz1LanAPUvl).  Mexico just bought 100 tons of gold, increasing their reported gold reserves by over 1300%.

There are several implications of this shift in behavior.  First, the sheer size of excess foreign reserves (newly created paper money) is literally scaring central bankers into an informal gold standard – they are not implementing gold convertibility but they are certainly choosing gold, rather than paper to back their liabilities.  Second, the manufacturers of our money, our Central bankers, are questioning the value of their product.  While we are unlikely to hear a central banker argue for a modern day gold standard anytime soon, it sure seems that they understand the need for one.