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Analysts: Central Banks Will Hold On To Gold

Release Date: 
Wednesday, August 24, 2011

Central banks, net buyers of gold for the first time since the 1980s, are likely to retain their gold holdings even if they need to raise cash to counter an escalating debt crisis, according to analysts at Morgan Stanley and Haitong Futures Co. "Once they've sold, that's it, and buying back would be extremely expensive," said Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., who has studied the metal for 20 years. "They would rather have the backing of a rising asset within their reserve portfolios than use it to reduce debt."

"The European central banks won't sell their gold because while it may be a means to raise cash, it definitely won't be enough to settle their debts," said Duan Shihua, head of corporate services at Haitong Futures Co., China's largest brokerage by registered capital. "Besides, none of the central banks believe in the currencies of other countries."

"Under conditions of austerity we're going to see a further deterioration of debt," said Richardson at Morgan Stanley. "Rising risk argues in favor of holding on to their gold reserves rather than selling them because they've only got one shot at selling."

Analysts continue to focus on investor safety as a demand driver for gold. "Gold is very well bid every time prices come off," Duan noted. "This will keep prices supported as investors continue to look for a safe place to put their money." A lack of confidence is driving gold and stocks in opposite directions, said Suki Cooper, precious-metals analyst with Barclays Capital.  Investors need to safeguard the wealth that has survived the volatile swings since the financial crisis, and gold appears to be a safe place to park cash, Cooper noted. "The dynamics hinge on market confidence, and that's favoring gold."

In fact, gold and stocks are moving in opposite directions to a degree not seen since 2008, as investors shed assets amid fears about the global economic outlook. The 30-day average correlation between gold and stocks has slumped to a three-year low of minus-0.903, on a scale in which minus-1 being the strongest possible negative reading.

"It just seems there's an extreme case of risk aversion at this point. It tells you that gold's in favor and stocks are out of favor right now," said Tom Pawlicki, precious-metals analyst with MF Global.

Gold prices have rallied 16% since the start of August, while U.S. equity indexes have tumbled deep into correction territory. The Standard & Poor's 500-stock index dropped 13% over the same period, while the Dow Jones Industrial Average fell 11%.

(Sources:  "Central Banks Seen Retaining Gold to Help Manage Debt as Bullion Advances,"Bloomberg, August 24, 2011;  "Gold Rises as Drop From Record, Concern About Slowing Growth Fuel Demand," Bloomberg, August 24, 2011; "Gold, Stocks Take Separate Paths," Wall Street Journal, August 23, 2011)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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