Gold and the throne game

What’s the story with gold these days?

Short answer: it involves central banks and the never ending geopolitical quest for world dominance. Now for the long answer…

Through much of 2011 gold was on a tear, even pushing through USD 1,900 an ounce, capping off a decade-long bull run. By September, the price was crashing, into the mid-$1,500s (it’s since recovered some).

All this price movement has taken some of the gloss off gold, has gold watchers confused and even has some of them questioning gold’s traditional role as a safe haven.

But underneath the short-term price fluctuations a few powerful players are engaging in some serious brinkmanship. How powerful are these players? Well, Putin, Chavez and Chinese Politburo powerful.

These chaps are buying up gold, and lots of it. Central banks around the world, led by the Chinese and Russians, are expanding their reserves for the first time in a generation. The World Gold Council reports that these and other government institutions may have purchased 450 tonnes of gold in 2011, compared to only 142 tonnes in 2010.

Sometimes they buy publicly: Putin has been photographed manfully fondling ingots. Chavez sent shockwaves through gold markets in August when he pulled Venezuela’s 99 tonnes of gold from the Bank of England’s vaults and flew it back to Caracas.

Sometimes they buy under the radar: China’s admission that it has increased its gold reserves by 450 tonnes in the past five years is notable for what it omits. If they declare 450 tonnes, how much have they really purchased?

If we try and read these gold-plated tea leaves, what patterns do we find swirling at the bottom of the cup? One thing is clear: Putin, Chavez and China all have something in common – they’re not big fans of the US.

Putin has described America as living beyond its means, like “a parasite” on the global economy. China often scolds America’s indebtedness and let’s not even start on Chavez’s feelings about the U.S.

They all agree that American dollar dominance – built as it is on huge debt – is bad for the global financial system. And buying gold is their way of doing something about it. The more they hold in gold, the more they diversify their massive portfolios. Which means they can hold less Greenbacks, and be less exposed to, and dependent on, America.

So it’s a power play, folks. Global domination ‘n all that. The game that never ends. It’s far from being the only factor affecting the price of gold but it is worth keeping a lazy eye on as the ancient story of the yellow metal continues to unfold in 2012.

Andrew Pegler – 23 December 2011