Why are central banks buying gold? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 12 December 2012
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Baltimore, Maryland

Gold is holding above $1,700. And everyone says the economy is recovering.

The worriers can stop worrying, say the pundits. The US has plenty of cheap oil. Unemployment is going down. Housing is going up.

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This is not time to buy gold, they say. The world is not going to end. You won't need it.

All year long, we've heard analysts tell us that the bull market in gold is over. Most recently Goldman's top commodity man announced that gold will go down next year, as real interest rates once again turn positive.

Gold was a nice thing to hold when the world was in a financial crisis, say the bears. It didn't hurt to have it when the price of oil was flying over $150 a barrel, they admit. But now...the trouble is behind us. Markets have stabilized. Europe has figured out how to manage its sovereign debt issues. China is not going to blow up anytime soon. And the US is on the road to a sustained recovery, thanks in large measure to huge new oil and gas output.

Who needs insurance in a world where nothing goes seriously wrong?

And yet, gold price holds above $1,700. It's up about $150 from the beginning of the year. Let's see, that's nearly a 10% increase. Not too shabby for an insurance policy.

And now comes word in the Financial Times that Americans are buying so many gold coins the US mint can barely keep up.

    Sales of American Eagles soar in fear-driven search for gold

    Demand for gold coins in the US has soared since the presidential election, as small investors fret about the lack of action to address America's ballooning debt.
Silly fellows. Don't they know there's nothing to worry about?

But what's this? Apparently, foreign central banks are being silly too. Here's another FT report:

    Brasilia joins Latin American gold rush

    In 2009...China announced that it had been buying gold and India purchased 200 tonnes from the International Monetary Fund.

    Since then, Thailand, South Korea, Sri Lanka and Bangladesh have all bought significant quantities for the first time in years, making Asian central banks the driver of official sector purchasing.

    Now the gold bug appears to be catching in Latin America.
Why are these central banks buying gold? Don't they know that gold holdings don't earn them any money? Don't they know they'd be better off with US Treasuries? Don't they know the dollar is as good as gold?

Apparently not.

And we're not so sure either. If the US really were in a recovery we'd soon see interest rates rise...and consumer prices go up too. You would expect gold to go up along with everything else. Then, things would get very interesting. The Fed would have to choose - either back off from EZ money policies or risk runaway inflation.

If the Fed were to "pull a Volcker," we'd agree; it will be time to sell gold. But 2013 is not 1979. And Ben Bernanke is no Paul Volcker. More than likely, Bernanke will "pull a Gono." Gideon Gono was responsible for the hyperinflation in Zimbabwe, 2006-2008, when the value of the Zim dollar didn't just go down - it disappeared completely.

And now, a new feature, Zombie Watch...

First, from Bloomberg:

    $822,000 Worker Shows California Leads U.S. Pay Giveaway

    Among the largest states, almost every category of worker has participated in the pay bonanza. Britt Harris, chief investment officer at the Teacher Retirement System of Texas, last year collected $1 million -- including his $480,000 salary and two years of bonuses -- more than four times what Republican Governor Rick Perry received. Pension managers in Ohio and Virginia made up to $678,000 and $660,000, respectively, according to the data, which Bloomberg obtained using public- record requests. In an interview, Harris said public pension pay must be competitive with the private sector to attract top investment talent.

    Psychiatrists were among the highest-paid employees in Pennsylvania, Ohio, Michigan and New Jersey, with total compensation $270,000 to $327,000 for top earners. State police officers in Pennsylvania collected checks as big as $190,000 for unused vacation and personal leave as they retired young enough to start second careers, while Virginia paid active officers as much as $109,000 in overtime alone, the data show.

    The numbers are even larger in California, where a state psychiatrist was paid $822,000, a highway patrol officer collected $484,000 in pay and pension benefits and 17 employees got checks of more than $200,000 for unused vacation and leave. The best-paid staff in other states earned far less for the same work, according to the data.
And from R. Jeffrey Smith:

    Officials in central Indianapolis thought deeply a few years back about what equipment they needed to defend against a local attack involving weapons of mass destruction, such as chemical arms or a nuclear bomb, and their answer was (ba dum, ba dum) a hovercraft!

    Luckily, the city didn't even have to foot the$69,000 bill. The funds instead came from a Federal Emergency Management Agency program known as the Urban Area Security Initiative, which has so far spent more than $7 billion trying to make about five dozen of America's cities safe from the threat of terrorism.

    When officials in Louisiana calculated how they could best deal with the terrorism threat in their own backyard, their answer in part was - yes, really - a teleprompter and a lapel microphone, again purchased with funds from the FEMA initiative. Similarly, Oxnard-Thousand Oaks officials in California deliberated and decided to buy new fins and snorkels for their dive team.

    But the City of Clovis in that state was even more creative: They used a $250,000 FEMA grant to buy an armored vehicle known as the BearCat, which wound up being used to patrol at an Easter egg hunt and other public events.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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