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What is central bank gold buying telling us...?

GOLD IS HIGHER than ever before both in Dollars and Sterling and is still climbing, writes Julian Phillips of the

Many investors are waiting for a fall in the Gold Price, because they are looking at the past market shape, and that has not yet factored in the major sea-change in the shape of demand. Even many institutional analysts have not realized just what has happened to the gold market, and turn only to their charts to decipher the next moves.

Our subscribers, we hope, have realized from our writing and forecasts that a great deal more is still to come, however, in this gold market in the years to come. Essentially there has been a leap in its evolution, due to the IMF Gold Sales. The pending sale of 403.3 tonnes was previously seen as an overhang on the market, and one that pointed to the days when gold's price would peak. But the reverse has occurred.

Once the first portion of the 403.3 tonnes sale was announced, sentiment turned. Now we are waiting for further announcements on the third tranche of 201.3 tonnes. Please note that India indicated it would be an ongoing buyer of gold from the IMF. And Mauritius is happy with its 2 tonnes.

However, if the next buyer is another central bank – and not Russia or China, as many expect – the market will again be surprised and take the Gold Price even higher we believe. Chinese buying would have the same impact, with all eyes on the quantity it buys. This is because of the tide of central bank's changing attitude to gold expressed in the action of Buying Gold, has not yet been fully accepted by the market place and monetary analysts.

To do so would also herald as well as define dropping confidence in the US Dollar and other paper currencies. Monetary authorities will fight this all the way, even in the face of gold buying by central banks.

A look back in history to the time when the IMF first sold gold shows us that their motive was to support the Special Drawing Right – launched in the late 1960s to replace gold as the ultimate international reserve. But this attempt to build confidence in SDRs failed, and the IMF's motive this time is entirely different. They simply want to sell gold for as much as they can. It's not small amounts of gold either, as this is the first time since the US and the IMF sold gold in large amounts late last century (then some 500 tonnes at a time, and at auction) that the market has been able to buy gold in large tonnages. It may well be the last time too!

The sea-change attitude to gold has now been shown by these sales. It is fast-developing economies who want to hold and Buy Gold. This is not a temporary phenomenon; it is a change in attitude from what has dominated for the last 38 years, since Nixon closed the 'gold window' on selling the US Dollar for gold in 1971. One cannot underscore this new sentiment sufficiently. It will hold sway for at least a decade if not longer, but the clouds on the horizon make it difficult to see more than a couple of years ahead.

Look at the last five years changes in the global economic and political world. Unbelievably, the Western financial system saw a breakdown that startled and disappointed even its staunchest supporters. The system was saved by the skin of its teeth. Today, the banking system – standing as the arteries and veins of this system – seems disconnected from the needs of the world, riveted by its own greed. As the tentacles of the banking system followed the economic development in all countries, so the ripple effect of these crises spread globally into all countries except China and India. In China the government has a tight grip over every part of economic life and can effectively dominate the banking world. That's why China keeps growing so much. In India, a cash-driven Society, banks, like government are viewed with suspicion and find making headway extremely difficult.

With the currency system and foreign exchange markets based upon the banking system (banks remain the major players when it comes to exchange rates), the crises flowed into all nations to some extent. So far the root causes of these crises have not been attended to – so they stand a real chance of re-occurring.

The crises are now seen in the global economy as a US Dollar crisis. After so long a decline in the exchange rate of the US currency, the US monetary authorities are doing nothing about it, except to keep repeating that they favor a strong Dollar. This is now bordering on the ridiculous, as all can see that the US stands to gain so much from a falling currency.

Now extend this analysis and we are facing a growing situation where political tensions start to grow. President Obama went to China where he faced confident leaders. What did he get? He wanted China to let its currency rise (this won't happen). He wants friendly cooperation between the nations (he will get this only in so far as it suits them both). But very much to the point (regarding currencies), he then said that, "If we don't solve some of these problems, then I think both economically and politically it will put enormous strains on the relationship."

A look at the two very different national interests shows that there cannot be cooperation on currency issues. Political pressure therefore has to rise in the days ahead. Bear in mind that the battlefields are not on land but in the banking and currency worlds, where all economic exchanges happen. And here is where the influences on the Gold Price will be most keenly felt.

Already the US has seen a decimation of its manufacturing base, a feature that President Obama realizes. In recognizing this he has said, "It is particularly important for us, when it comes to Asia as a whole, to recognize that in the absence of a more robust export strategy it is going to be hard for us to rebuild our manufacturing base and employment base in this country."

Take this to a global view, where last year the G-20 expressed a desire to find global cooperation of monetary and economic issues and what do we now see? Central banks and government intentions are now subsiding finance and growth, and coordinated activity among member states is being replaced by more unilateral, nationalistic decision-making by individual countries. As gold is now a 'tacit' currency, gold is benefitting as the prospects for collective action on currencies is included.

As we have expressed before, the overriding objective of nearly all members now is to maintain some level of currency competitiveness – all of which makes a weaker US Dollar likely and benefits Gold Investment. With national interests becoming more selfish as the pressures grow, political tension between East and West must also grow. In this way we are moving towards 'extreme times', and this is when gold becomes money and its owners call the shots.

Central bank gold buying is telling us that.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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