The reservation of gold in central bank 2011

The reservation of gold in central bank 2011
The reservation of gold in central bank 2011

SEEING WASHINGTON'S belligerence over how Beijing pegs the price of its Yuan, three unsettling facts are buried amongst the latest central-bank gold data compiled by the World Gold Council...

• Central banks worldwide grew their physical gold reserves at the fastest pace since 1965 in 2009, adding bullion for the first time in two decades as a group;
• Emerging economies added a near-record volume of metal to their official reserves, putting more than 21% of all the gold held by sovereign states outside the control of developed-world OECD members;
• Western central banks, in contrast, shrank their reserves by more than 1% last year. Since the end of 2004, they have sold almost twice-as-much gold as non-OECD members have acquired (1881 vs. 994 tonnes).

As the gold-bug's Golden Rule says, "He who has the gold makes the rules" – an historic fact proven by the United States' own dominance of world finance and politics since the end of WWII.

And now that Congress is threatening trade sanctions against China for under-valuing its currency, the Yuan, Washington might want to take note of how its Dollar came to be the world's No.1 currency.

buyer's of gold checklist

#1. Don't take it home, except maybe a few coins
History is littered with sad stories of people who bought gold (rightly) because they feared severe economic contraction in their home country, and then made the mistake of holding their gold at home. When they needed it they could not release its value because it had become contraband.

Think of Zimbabwe (now), Argentina (2001), Yugoslavia (1990s), Vietnam & Cambodia (1970s), Nazi Germany (1930s), the USA (1933), Russia (1917). Gold secures your wealth when it is held in a reliable country. This is unlikely to be your own country if you are wise to be buying gold.

2. Buy 'Good Delivery' fine bullion to save 6-10% over coins & small bars
The world's best gold (assayed at 99.5% or better, and traded 100% 'fine' – i.e. gross bar weight x assayed purity) has a rock-solid perpetual guarantee of its quality and is, surprisingly, also the cheapest. Good Delivery gold also sells for the highest prices. That's because Good Delivery bullion is the spot market standard and is massively more liquid than coin markets.

3. Use allocated storage at a commercial vault – not a bank
Persuading you to hold your gold 'unallocated' lets banks finance their own liquidity reserve with your gold. It is so attractive to banks that they significantly overcharge for the safer 'allocated' storage option. So don't use banks to store gold. Instead, use fully allocated and insured commercial vaults; they don't have a liquidity reserve requirement, and therefore have no motivation to overcharge for allocated.

The wholesale storage rate (including insurance) is about 0.1% per annum in a commercial vault. It will usually be many times that much in a bank. BullionVault charges 0.12% per annum, with a minimum of $4 per month.

4. Direct overseas ownership
Don't get caught out by a trust deed or vault in the wrong jurisdiction. Think about exchange controls. In a world of severe economic contraction, you would almost certainly still be able to travel (if you can afford to buy the ticket), enabling you to physically collect your gold and realize its value outside controls in your home jurisdiction. This is why direct overseas ownership often works better than ownership through a trust. An intermediating trust deed could result in the ownership of gold effectively being trapped in the country where the trust was set up.