The Money Managers Driving Gold Higher

Foreign governments are losing faith in the dollar, and they like gold -- increasingly so. This week produced more evidence that the official sector (central banks, sovereign wealth funds, and multilateral organizations) want to own more bullion, and they intend to act on that wish.

Gold makes a comeback
This month, I pointed out that Eurozone nations, which already control more than a third of total gold reserves, are net buyers of gold so far this year -- the first time since 1999. This week, a survey conducted at UBS' annual Reserve Management Seminar confirms that shift in attitude toward gold. In aggregate, the institutions represented control over $8 trillion in assets.

It's not difficult to find a rationale for the change. More than half of the managers said they thought a basket of currencies would replace the dollar as the world's reserve currency within the next 25 years. This idea has already been raised by China, which has the largest foreign currency reserves of any nation (China is a net exporter, so the sum it needs to invest keeps increasing). At least year's conference, a majority of the managers said they thought the dollar would remain the reserve currency of choice over the next 25 years.

The dollar hits an all-time low
Who'd have thought that more money printing, a political squabble over the debt ceiling, and a complete inability to address an expanding budget deficit would damage the currency's credibility? On Tuesday, the greenback fell to an all-time low against the Swiss franc, a traditional safe-haven currency.

Gold, on the other hand, broke through the $1,500 level this year, setting another all-time nominal high. Six percent of reserve managers indicated that the biggest change in their allocation over the coming decade would be increases in their bullion holdings. Conversely, none of the managers said they were planning to sell gold over the same period. The survey responses aren't weighted by assets, so there is no way to gauge the underlying buying power.

The trend is up
With the rise of exchange-traded products like the SPDR Gold Shares (NYSE: GLD  ) , the iShares Gold Trust (NYSE: IAU  ) , or the Sprott Physical Gold ETV (NYSE: PHYS  ) , the relative influence of the official sector in the gold market has declined. Make no mistake about it, however: Central banks are and will remain critical players, with significant sway over prices. Gold bulls may be overpaying for the yellow metal, but they are in good company. The trend is to higher gold prices, and there is no obvious catalyst for a reversal.

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Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of Sprott Physical Gold Trust ETV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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