Central Banks Rapidly Accumulating Gold: What's the Message?

Bloomberg News reported this morning that Central Banks globally in 2009 increased their gold reserves for the first time since 1988 at the fastest pace since 1964. Moreover, 2009 saw a general movement of investment globally into gold: “There’s clearly been a renaissance of gold in central bankers’ minds,” said Nick Moore, an analyst at Royal Bank of Scotland Group Plc in London. “It’s not just been central banks taking on gold, but a general shift for physical gold in the investment sector” (LINK).

We know that China, Russia and India are hoovering gold. And we know that the European Central Bank system has not sold any gold for several weeks and is on track to fall well short of its yearly sales quota of 400 tonnes. We don't know what the U.S. Fed is doing with its gold, as there is absolutely no transparency on this matter. The U.S. gold reserves have not been independently verified or audited since Eisenhower was President and every attempt to obtain information about the gold using the Freedom Of Information Act has been denied by the Fed. A lawsuit by GATA seeking to force the Fed's hand is currently pending in the U.S. district court in DC.

I believe that the massive accumulation of gold by Central Banks represents a gradual movement from a global currency system that is based on fiat - "full faith and credit" (i.e. "trust us") - to one which will be based on a currency system with some kind of hard asset backing, and that the hard asset will be gold. I'm not alone with this view, and as nauseating as it is for me to quote Dennis Gartman, he is of the similar view as me (from the Bloomberg link above):  “Gold is quietly, at the edge, becoming the world’s second reservable currency, supplanting the euro and rivaling the dollar," Dennis Gartman, a Suffolk, Virginia-based economist and hedge-fund manager, said in his Gartman Letter today. “The trend shall continue months, if not years, into the future."

It will take some time and a considerably higher price of gold in order to accomplish a gold-backed currency system.  Historically, when the world has operated under such a system - which was really up until the Bretton Woods Agreement in 1944, Central Banks held 40% of their currency reserves in gold.  Consider now that most CB's hold well under 10% of their reserves in gold.  Given the declining output in gold -something which can be partially remedied by a much higher price of gold, which would stimulate more exploration and production - it will take a significantly higher valuation price for gold in order to achieve this historical 40% reserve metric.

Thus, the message of the market with respect to gold is clear:  smart investors should shift a considerable portion of their investment portfolio into gold (and silver and mining stocks) and the price of gold is going to go much higher for several years.  If you think I'm whacked out in my view, please take a few minutes to read this essay on using gold as a currency backing written by none other than Alan Greenspan in 1966:  GOLD AND ECONOMIC FREEDOM