Look Who’s Touting Gold

By Patrick A. Heller April 19, 2011

It would be natural for those who make a living buying and selling gold to tout the ownership of the metal. It is much more unusual to see a survey, such as one released last Wednesday, where the ownership of gold is touted by professionals whom you might think would be the last to do so.

Before I tell you who they are, let me review some of the results of the survey. As you read these points, remember that this survey was conducted well before the upheaval in financial markets of the past couple of months.

Over 70 percent of those responding to this survey predicted that central banks will likely remain net buyers of gold reserves.

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The number one reason given for this judgment was “gold’s traditional value as an inflation hedge and store of value.”

The survey respondents considered gold as a safe reserve asset.

Compared to the prior year survey, three categories of assets were considered more attractive than before: gold, investment grade corporate bonds and bonds rated AAA.

In contrast, compared to a year earlier, rising government debt and super-loose monetary policies by the world’s major central banks resulted in reduced confidence in more traditional reserve currencies (with the U.S. dollar being the prime example).

Among all survey respondents, 25 percent said that in the past year they had increased their percentage of assets held in non-traditional reserve currencies such as the Australia, Canada and Singapore dollars and Swedish crown. The China yuan was considered attractive, but interest was constrained by its poor liquidity and other investment hurdles.

Of the new bonds issued by the European Financial Stability Facility, the temporary rescue fund for weaker euro zone economies created last May, 81 percent of respondents consider them as attractive assets. The only drawback to these bonds was uncertainty about the secondary market liquidity of them.

Although U.S. Treasury debt was still considered a relatively safe asset “in the absence of a credible alternative” the second round of quantitative easing announced by the Federal Reserve after last November’s elections led to a shift of investments into shorter duration U.S. debt.

The largest loser in investment interest over the past year was the euro.

Here are some anecdotal comments made by some survey respondents.

“Traditionally, government bonds have been termed ‘risk-free’ assets but the euro zone situation has made some of us change our understanding of that.”

“Both the euro zone and the U.S. are confronted by large deficits with simultaneously modest growth, which has influenced the value of their currencies and raised questions about debt sustainability.”

Have you been able to identify the respondents to this survey?

The survey was conducted over the winter by Central Banking Publications, the publisher of the magazine Central Banking. The 39 respondents to this annual survey were the managers of reserve assets for central banks. The respondents to this survey manage $3.5 trillion of central bank reserves, about 35 percent of total global reserves. For the purposes of being able to manage their own nation’s reserve assets, these respondents have the strongest incentive to refuse to acknowledge gold as a safe haven asset.

Yet, despite their aversion to doing so, these same central bank reserve managers admitted that they like the prospects for gold and had a negative outlook for major currencies such as the U.S. dollar and euro.

The survey’s author, Nick Carver, stated, “Gold’s quality as a store of value and fears over reserve currencies are the main reason that central banks turned net buyers of bullion in 2010.”

This survey is reported at http://www.centralbanking.com/central-banking/news/2042937/central-bank-reserve-managers-recoil-sovereign-risk. Unfortunately, this is premium content that is only available to subscribers. This survey is also the first chapter in an annual book titled “Reserve Management Trends 2011” issued last Wednesday by the Royal Bank of Scotland.

Maybe you are skeptical about my having an inherent bias when I give you the reasons why you should own gold and silver as part of your assets. I can understand that skepticism. Instead, maybe you will accept a similar judgment from major financial managers who like gold’s prospects even though they are professionally loathe to admit this fact.

Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at CoinUpdate (http://www.coinupdate.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).