Between the end of August and the end of November Russia, according to the I.M.F., increased its ‘Official’ holdings of gold by 9.2 tonnes, which averaged a cautious 1 tonne a week. For them to reach the targets implied by government officials as high as President Putin wanted at 10% of reserves, they will have to increase the pace of these purchases dramatically. With oil exports roaring along with the higher oil price and Russian reserves burgeoning, a gold price rise cannot, at this stage, be expected to rise fast enough to make this figure a reality all by itself. Much heavier purchases need to be made.

But what is important is that a start has been made in buying in the market. We have always been skeptical because of the length of time it has taken Russia to start putting its money where Putin’s mouth is. Let’s see if they are really serious? For a Central Bank to go into the gold market to buy alongside Joe public is a daunting task if the gold price is not going to turn into a shooting star. But here is a start. 

Other Central banks in the Central Bank Gold Agreement have just entered the market to BUY more coins [to refine existing stocks of currently owned gold coins is one thing, but to go into the gold market to buy good amounts of gold coins [the second instance now] is another thing. If this continues it will be extremely difficult to make us believe it is a ‘housekeeping’ exercise again? The much lower gold sales by the signatories of the agreement on a wekly basis shows us that the heart is leaving the gold sellers now.

Meanwhile the Russian Central Bank is thinking about broadening the mix of currencies in its gold and foreign-exchange reserves, Russian C.B. First Deputy Chairman Alexei Ulyukayev said. The Central Bank is currently authorized to keep its reserves in the $, the €, yen and the pound sterling. The yen's weighting is currently low because this is a low-return instrument, and managing the reserves costs money, Ulyukayev said. 

"We're thinking of expanding the range of currencies," Ulyukayev said. He said a wide range of currencies was under discussion, but that it was unclear which of them would be selected and when. Perhaps they will follow the Chinese example and save the currencies of its main trading partners no matter who they are [including the currencies of the buyers of its oil]. It is of course risky to buy currencies that are too ‘soft’.

The trend away from the U.S.$ is gaining momentum, before it falls?

The Changing Global Economy

We have talked here in recent issues of the shifting power to the East. We now have some facts confirming this: 

q       Emerging economies for the first time accounted for more than 50% of the global economy. 

q       Strong overall European growth after years of sluggish performance shows that despite the U.S. slowdown, the rest of the world is in significant growth mode, underscoring something of a decoupling of the world from the U.S.

 Zhu Min, group executive vice president of the Bank of China, one of the country's largest banks, told the audience that China was poised for another year of strong growth. "China will have an even better year this year," Zhu said, citing last year's efforts in the second half of 2006 to re-balance the economy by slowing export-led growth and encouraging domestic consumption.

Why mention this again you ay well ask? The ramifications of such a change are critical for the globe. To imagine that such a shift in power will happen without a whimper is to live in a dream world. Our concern is simply on the ramifications for gold and precious metals.

What we can say going forward is that global growth will remain strong irrespective of the performance of the States, so there will be a climate where safe investments are sought by Investors with the competence to invest in them. The uncertainty that will prove a growing feature of the future will increase Investors attention on the stateless nature of gold. The importance of the origin of national currencies will grow as the global economy evolves into its new shape, changing structures put in place at the end of the last world war.

The comfortable confidence in the U.S.$, on which so much of the globe has depended for the entire working lives of the world’s executives is going to change. Companies will have to understand and measure currency and political risk far more than in the past. With the lowering of the importance of the U.S. will come the raising of China and the emerging economies places in the international money systems. 

It may even get to the point where the price set for a U.S. export item is set in the € and eventually in the Yuan. Can you imagine that? As currency performances become more and more volatile, a certain ‘currency patriotism’ could emerge in international trade. As we are already seeing the concept of a “basket of currencies” reflecting another’s currency is taking hold, replacing the previously solid link to the U.S.$. It should be more common to see emerging nations pricing their own goods in their own local currencies, diversifying larger countries foreign exchange reserves remarkably.

Of course, in such a higher risk and more volatile climate, the words of the President of the German Bundesbank President, “gold is a useful counter to the swings in the $” will echo in all the corridors of the globe’s major banks. But this time the word $ will be replaced with “currencies”, making the holding of gold a matter of prudence.

It is in this climate that gold and its shadow silver will grow into the future, far from a commodity or simple investment into dependable support for currencies. Further, it is in this climate that far higher than forecast prices for gold and silver will be achieved. We at “GoldForecaster” & “SilverForecaster” will be tracking these developments in depth. As the monetary facets of gold and silver grow, investment growth in the two will follow with greater and greater firepower. Eventually this aspect of gold and silver will overshadow the other aspects of demand for the metals.

© 2007 Julian D. W. Phillips
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