Fears of a sharp decline in the value of the US dollar are making emerging economies such as China and India anxious to increase their central banks' gold holdings.
China has $2 trillion of reserves, but only 1% of that is in gold while the rest is almost entirely in USD. China currently holds about 12% of US treasury securities with a total value of $681.9 billion. It was reported in November of 2008 that China's central bank is aiming to increase it's gold reserves, which currently rest at 600 tonnes, by 4000 tonnes.
European central banks are also reportedly selling an unusually small amount of gold, as governments are keen to hold onto and increase their gold stocks as a hedge against the worsening markets and the US economic crisis. This is clearly a sign of their lack of confidence in the dollar.
The US dollar is currently appreciating in value against other world currencies, but that is largely due to liquidity and will reverse in the not-too-distant future. The massive American bailout packages and America teetering on the edge of a depression leave the dollar's value extremely uncertain, and very likely to fall hard as foreign investors lose confidence in the US economy. With the US government's very deeply engrained habit of funding its deficit with debt and by printing new money that inflates and devalues the currency, it's very unlikely that the world can maintain its faith in the US dollar throughout this crisis.
The good news for gold investors is that as demand for dollars in reserves decreases, demand for gold will obviously increase. China's desire to accumulate 4000 tonnes of new gold reserves is impressive, since global annual gold consumption is around 4000 tonnes, and global annual mining output is only 2500 tonnes. This demand will be hard to fill. And the law of supply and demand dictates that commodities that are in demand hold more value.
And of course, there will be increased demand from individual investors seeking a safe haven from the dollar as it becomes more and more devalued. When the average person realizes that the major players have already begun abandoning the US dollar in favor of gold, that's when we will see a huge transfer of value to gold as demand suddenly shifts.
I can not envision any scenario in which the value of gold does not continue to increase in the future, at least for the duration of this crisis, which I think will be very long. I always watch what the very big players are discreetly doing, and they seem to know that the gold market is currently the best market to be in.
Reference: Reuters, Dow Jones Newswires