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Gold: Listen to the Money Printers

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At the end of June, I wrote that we might be at an important turning point with regard to central bankers' attitude toward gold. Today, the metal hit a record high on news that many European central banks have all but ceased gold sales. This suggests that officials believe the price will continue to rise and, more importantly, it removes an important source of supply from the market. Is this simply another milestone in gold's ineluctable ascent?

The Central Bank Gold Agreement (CBGA), signed in 1999 and renewed last year, is a framework for coordinating gold sales by central banks of the eurozone, Switzerland, and Sweden (don't look for a free market in this commodity). In the agreement's most recent year, which ended yesterday, the signatory banks sold just 6.2 tonnes -- compared to an annual average of 388 tonnes over the past decade.

The German hawks' hedge
Germany, which holds the second-largest gold reserves behind the United States, announced that it would not sell any gold in the current agreement year beyond the 6.5 tonnes it is flogging ... to its own Finance Ministry. Perhaps the deficit hawks at the German Bundesbank and the Finance Ministry want to keep a hedge in place in case they fail to coerce the rest of the eurozone into accepting swinging austerity.

(The private sector also gave the market the thumbs-up today, with the world's No. 1 gold producer, Barrick Gold (NYSE: ABX  ) , saying the metal could "easily" break its recent record high to rise above $1,500 "in the next year.")

How much do central bankers know?
Do central bankers know more about the price of gold than investors? Many conspiracy theorists would have you believe this, but I don't think officials are all-seeing. In fact, they are as prone to being influenced by the commodity's current strength as the next person. They haven't always been on the right side of the market, either: Witness the U.K. Treasury's May 1999 announcement that it would sell half of Britain's gold reserves, which sent gold to a 23-year low (near $250!). Still, central banks control a big chunk of the gold supply and that means their views -- right or wrong -- have a material impact on prices.

The gold conundrum
As far as I'm concerned, gold poses a conundrum. On the one hand, it appears to be acting as an effective hedge against monetary debasement, and almost everything I observe leads me to believe that prices will go higher still in the medium term. However, without any notion of intrinsic value to anchor on, it is difficult for me to encourage investors to continue accumulating gold at this time. If you do wish to own some gold exposure, I think any of these three gold ETFs are fine vehicles: SPDR Gold Shares (NYSE: GLD  ) , ETFS Physical Swiss Gold Shares (NYSE: SGOL  ) , and iShares Gold Trust (NYSE: IAU  ) .

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Alex Dumortier does not own any shares in the companies or ETFs mentioned. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 28, 2010, at 4:24 AM, goalie37 wrote:

    Cramer on Gold: ‘$1,300 Is Not a Top’

    Uh oh.

  • Report this Comment On September 28, 2010, at 5:06 AM, KurtEng wrote:

    The last decade has been the best time to buy gold in the last century, but those banks were selling the entire time. It seems like they aren't the best predictors of gold prices.

  • Report this Comment On September 28, 2010, at 12:59 PM, wallsttobayst wrote:

    We have been bullish on gold, but are always weary that we could be in a possible bubble; we are conducting a survey to determine public and investor sentiment on physical gold. Visit our blog to help us gather real data about gold. Check back for results about who owns gold.

  • Report this Comment On September 28, 2010, at 6:05 PM, FinnMcCoolIRA wrote:

    The current Obama regime WANTS to cause a run on gold and increased inflation in order to 'pay' for the redistributionist socialist policies.

    Emigration is looking more and more inviting!

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ABX $16.92 Down -0.12 -0.70%
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