Why are Central Banks Buying Gold?

Central banks have pulled 635 tonnes of gold – the largest withdrawal in more than a decade –  from the Bank for International Settlements in the past year and, as such, begs the question:  If central banks [supposedly] believe in the value of paper money and their ability to create wealth by printing it then why are they loading up on Gold?  The answer is simple: they see the writing on the wall [and that begs an even more important question: Shouldn’t you?]…Words: 600

So says Graham Summers (www.gainspainscapital.com)  in edited excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Summers goes on to say:

The central banks of the world are in a competition to devalue their respective currencies against each other…[because] these guys know that the financial system is broken. They’ve known it for over a decade…but they’re going to kick the paper money can down the road as long as they can… primarily because the entire financial system is banking on their ability to “fix” things.

The 2008 Crisis was the first taste of systemic risk. The central banks threw everything…at the problem in an attempt to hold things up and it’s worked, temporarily, in the sense that the financial world still believes central banks can handle the situation. The fact remains, however, that the central banks actually didn’t fix anything [because] you can’t fix a debt problem by moving it around and issuing more debt to meet current payments – you need to pay the debt off or default. In this sense, the world’s central banks literally “bet the farm” on themselves and the view that sovereign balance sheets can stomach this toxic waste.

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As we’re now discovering in Europe, the laws of the markets (oversaturation of debt, default and the like) apply to countries as well as private banks. The central banks know this and are now acting accordingly. It is not coincidence that they became net buyers of Gold within two years of the 2008 Crisis. Nor is it coincidence that they are now loading up on Gold at the fastest pace in over a decade. They KNOW (not think) that systemic risk is still on the table in a big way and that they will be POWERLESS to address the next Crisis when it explodes. You can already see this in their public statements. Bernanke himself even admitted the Fed has no idea why the economy isn’t recovering. If you extend the implications of this statement it becomes clear Bernanke and pals are realizing that printing money is not going to patch up the financial system… Hence the Gold purchases.

In plain terms, the REAL Crisis, the Crisis that was put off temporarily during the last two years, is coming. It will not be a Crisis of stocks or bonds. It will be a Crisis of the financial system itself – a Crisis in which entire countries default – and it will make 2008 look like a picnic. Remember, every asset class is defined relative to sovereign bonds. So if sovereign bonds begin defaulting… KA-BOOM. Round One (2008) of the Financial Crisis wiped out over $11 trillion in household wealth. Round Two will wipe out…?

On that note, smart investors are already taking steps to prepare for what’s coming. I’m talking about bank holidays, food shortages, stock Crashes, debt defaults, civil unrest and more.

*http://gainspainscapital.com/?p=552

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Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

Economy