Gold News

Central Banks Buying Gold to Prepare for Falling Dollar

The world's central banks are on track to buy more gold than any year since 1971...

IMAGINE THIS. You're in a packed bus on the edge of a cliff, see-sawing back and forth. On one side, the safety of the cliff-top. On the other, the abyss below. And everyone in the bus is arguing about the best flavor of ice cream, writes Dan Denning in his Daily Reckoning Australia.

The obvious answer is: strawberry. But the obvious point is when you're in a bus tottering on a cliff, you shouldn't be arguing about ice cream. You should be arguing about how to shift the people in the bus so its center of gravity is toward the front. Then everyone can get off.

It would be better to not be on the bus at all. But... shifting gears now to the sovereign-debt crisis – which currently features the nation of Greece as the lead protagonist – we are all on the bus whether we like it or not. So where is it stopping next, if not the abyss?

Well, European finance ministers are scheduled to meet on Sunday, July 3rd. By then, they hope the Greek Parliament will have approved the combination of budget cuts and asset sales required by Europe's overlords for Greece to receive $12 billion in emergency funds. The French are reportedly pushing for private sector creditors to roll over a portion of their Greek debt and voluntarily extend the maturity to 30 years.

The French have essentially said "We prefer chocolate. Strawberry is rubbish."

Greek communists and unionists, who've taken over the Parthenon with English language signs, are set to participate in Greece's first 48-hour national strike since 1974. The timing of the strike coincides with the debate in the Greek parliament over the austerity measures demanded by Brussels.

Brussels prefers vanilla.

The advantage of a perpetual debt system, where the government can roll over debt and always pay interest on that debt through taxes, is that you never actually have to pay off the debt. You just roll it over and keep on rolling...and borrowing. But we have reached the point in Greece where the people may no longer roll over and accept a debt burden that requires their sacrifices in order to satisfy Greek's creditors.

That's what makes Greece so interesting. A Greek default wouldn't be the end of the world. French and German banks stand to lose, as does the European Central Bank. And the Euro's credibility would be damaged. But the principle of what's happening in Greece is what's important.

If the general strike in Greece intimidates the Greek Parliament into voting "no" on the austerity deal, it will be a kind of tipping point in this Global Financial Crisis. It will be the first time ordinary people have rebelled against the measures imposed on them by central bankers and bureaucrats. It will be a precedent to follow in other countries where the default of the State on its debt obligations WILL have systemic consequences.

That list of countries includes Spain, Italy, and the United States. The Italians don't want ice cream at all, by the way. They prefer gelato.

None of this changes the fact that the bus is doomed. You cannot indefinitely promote state-sponsored prosperity by borrowing more and producing less. The Welfare State is cooked. And if you think that is hyperbolic, central bankers – the people who've been funding the Welfare State for years and collecting interest on it – know the gig is up.

That's why they're Buying Gold. They know the Dollar-standard is ending. Half of central bank managers surveyed believe the Dollar will lose its reserve currency status, according to this story in the Financial Times. Central banks have bought 151 tonnes of gold this year. That means we're on track to see the largest yearly purchase of gold by central banks since 1971, when the Bretton Woods world currency system collapsed.

This doesn't guarantee the Gold Price will go up this year. In fact it doesn't guarantee the Gold Price will be immune to a world-wide asset price crash when the bus falls off the cliff. But at the very least, it shows you that the underlying financial events you're seeing happen once in a generation. They are not to be taken lightly, even though they are often lightly dismissed.

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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