Time to Stop Drinking Central Bank Kool-Aid

Gold is up nineteen percent for the year, as of this writing, and after having tantalizingly touched just above thirteen hundred dollars per ounce earlier in the month, the shiny metal’s price retreated modestly, hovering just below that briefly-breached $1,300 mark.  Nevertheless, based on its stellar first-quarter performance, analysts at Capital Economics foresee gold’s continued strength:

“The upbeat Q1 figure is in line with our view that the official sector will continue to be a steady source of demand for gold, helping to underpin our positive view on prices.”

But what exactly is the “official sector” that’s on this buying spree?

“The primary driver of central banks’ gold buying continues to be diversification away from the US dollar with some also looking for a hedge against currency volatility more generally.”

There you have it—the buyers with the sky-high demand are central banks, the folks who insist you do as they say and not as they do. They’re perfectly content if you and I stock up on their printed paper money, while they continue to stockpile the world’s supply of gold.

According to Capital Economics commodities economist, Simona Gambarini, central-bank demand in the first quarter of this year is up twenty-eight percent over the same period last year. World Gold Council data reveals central banks have, during the first quarter, purchased a whopping forty-five metric tons of gold.

Of course this central-bank gold-buying whirlwind is principally about hedging paper currency.  But what’s fascinating is the public-face aspect of it all.  Back in February, Rosland Capital LLC’s senior economic adviser, Jeffrey Nichols, told Bloomberg:

“The Russian central bank is similar in some sense to the Chinese central bank ….They’re acquiring gold for strategic and political gain, with the hopes that their currencies will look more attractive if they have larger gold reserves.”

In other words, the worst-kept secret among central bank economists is that we, their customers, do indeed know the difference between paper currency and the authentic currency that is gold. So if we’re to believe the analysts, a key reason central banks are stockpiling gold is to signal the citizenry that everything is a-okay, regardless of what we may suspect.

But there’s no need for you or me to drink that Kool-Aid. We know central bank efforts to prop up their respective economies with inadequate spending incentives, negative interest rates, quantitative easing and mindless bond-buying have been an abysmal failure. We certainly know by now what they can accomplish and what they can’t.

Our primary concern should be to ensure our own financial affairs are in order.

In other words, we should be doing what the banks are, investing in the one liquid, tangible asset that actually contains inherent value: physical gold.  The big secret they don’t want us to grasp is what’s good for central banks is also good for us – excepting, of course, all the stimulus after stimulus that that failed to stimulate a genuine recovery. That‘s why when we save and invest, we need to act like our own private central bank.

How will you feel if you keep stashing away dollars, and you wake up one morning only to discover your bank has sunk to negative interest rates? In other words, if the economy doesn’t trim the buying power of your dollar stash, your bank will.  How will you feel if you save thousands in cash and dollar-denominated assets like stocks and bonds, only to discover central banks’ value-elimination tricks have irreparably shrunken the nest egg you’re counting on?

You’d better pay attention to what the man behind the curtain’s doing before it’s too late.  Because I guarantee what he’s doing is buying up real currency – gold – the one commodity that continues to hold its value.