Central Banks Rushing For Gold

Russia, India, Saudi Arabia and the Philippines follow Soros and Paulson into the Yellow Metal.

No wonder gold rose to $1,260 an ounce this week before easing. One by one, central banks are amassing major gold positions, proof positive that they want to participate in the world's most glamorous asset class. Think central banks taking investment advice from global hedge funds.

This is probably a unique order in the investment jungle. The major seller, the International Monetary Fund, does not look too sharp. It sold 541,700 ounces of the shiny metal in July alone according to Uncommon Wisdom, an investment service I've been monitoring.

So far in 2010 Russia has increased its gold holdings by 2.8 million ounces, $3.6 billion at current prices. Total holdings by the Putin government total almost $30 billion. Saudi Arabia and the Philippines have disclosed new gold buying in 2010, plus India, Sri Lanka and Mauritius bought gold in 2009.

The World Gold Council seems sure the People's Bank of China also is a major accumulator of gold. It makes sense that some portion of China's $2 trillion in reserves would be held in gold. It is a hedge against global economic uncertainty. For others, it is a substitute for paper money. More recently, it's been a hot investment.

This central bank buying reverses the prevailing trend of the past several decades of central banks selling excess gold to the speculators. Can China not be steadily and secretly taking a massive position? We will try to find out next week from a well-placed Hong Kong source.

Gold is rising in price and will continue to do so because demand is rising far faster than any potential supply to meet it. Mine production has remained flat even as investor demand more than doubled so far in 2010 compared to a year earlier. Exchange-traded funds likeSPDR Gold Shares ( GLD - news - people ) and iShares COMEX Gold Trust ( IAU - news - people ) have exploded 25% higher in the past year, far better than 8% advance for the S&P 500.

It has not been lost on central banks that the dollar has lost 80% of its value against gold since 1999. Just as serious, dollar-denominated stock market indexes have also lost around 80% of their value relative to gold in the past decade. There is unmistakable fear that precious metals may well hold their value or rise in value as paper money gets trounced.

A wealthy precious metals investor recently warned me to move at least some of my investments out of the U.S. to safer havens and to switch dollars into gold and real assets, like other commodity producing properties.

Think about it, the price of gold has gained 12% in the past 30 days, 24% over the last six months and 192% over five years. Does that seem like a fad, a fluke? Sure, gold is volatile. It is back down to $1,245 an ounce from $1,260 two days ago. It backed and filled for some time before rising to new highs in the past decade.

The role of gold is changing. For some it is a hedge against global economic uncertainty. For others it is an alternative to holding paper currency, especially because of doubts sovereign debt levels can be permanently reduced to manageable levels. Gold as a safe haven is a concept driving pension funds, endowments, and family offices, sophisticated investors, to have a portion, say 5% to 15% of their massive portfolios, in some form of gold, be it gold bullion held in a bank safety deposit box, gold mining shares like the Market Vectors Gold Miners ETF ( GDX - news - people ). There's even outright ownership of part or all of a gold mine.

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We'll never hear of it, but I know f or a fact that leading investment banks own for their own account gold mining properties. Investors are looking at publicly traded Russian gold companies that are expected to double their gold production in the next five years, according to Frank Holmes, CEO, U.S. Global Funds.

Safer choices probably are Barrick Gold ( ABX - news -people ) or Newcrest Mining in Australia, which has an 8% weighting in Christopher Wood's long only absolute return portfolio for Asia ex-Japan. Wood, author of the Greed & Fear weekly letter, has been recommending gold since it was $375 an ounce.

My prediction is that further negative equity returns will result in further positive price action in gold.