Gold Price Disconnected from Central Bank Balance Sheets

With this correlation between central bank balance sheets Vs. gold in our minds, we can confidently say that gold will have to move to $2000/ounce in a hurry to balance out all the money printing in this world.

Central Banks Vs. Gold Price

To help you monitor the balance sheet expansion, you can check this chart daily. Look how Japan is almost winning the race from Europe.

China Central Bank Gold Holdings Don’t Match

Today China came out with their Central Bank Gold Holdings.

They reported 1054 tonnes as always since 2008. But this is impossible. Here is why.

China imports gold and also produces gold. This total addition in gold has surged since 2008 (white bars), due to the imports through Hong Kong. China consumes 60% of its gold in jewelry, the other 40% is added to the central bank gold reserves. This implies that we have 2710 tonnes instead of 1054 tonnes. That’s almost 3 times the reported number from the Chinese government. 

China Gold Reserves

Additionally, the total assets of the Chinese central bank has gone up from 3 trillion to 6 trillion from 2008 till now, which is a doubling of the balance sheet.  And you tell me that they didn’t buy any gold since 2008?

I believe they want to quietly buy more gold…

Correlation: Total Central Bank Balance Sheet Vs. Gold Price

I once said there was a correlation between the Federal Reserve balance sheet and the gold price. As a result there is also a correlation between M1 and the gold price. This is still the case.

But gold is universal, so you should look at the balance sheets of every central bank in the world.

Chart 1: Total Central Bank Assets

Even though the Federal Reserve balance sheet has been going up due to QE3, there is one central bank that did the opposite recently. That dreaded central bank is the ECB.

As you can see on Chart 2, the ECB has shrinked its balance sheet due to the repayment of LTRO. European banks paid off 137 billion euro on 25 January 2013. So you can see the dip here.

Chart 2: ECB Assets

That repayment of LTRO coincided with a rise in the EUR/USD (Chart 3).

Chart 3: EUR/USD

And a drop in gold price in euros.

Chart 4: Gold Price in Euro

So forget complacency in the Eurozone as reason for the dropping gold price. Just look at the balance sheet of the ECB as primary reason.

We may not forget that the ECB has one of the largest balance sheet in the world (after China) and we need to monitor their balance sheet even more than the Federal Reserve balance sheet. Japan should be monitored closely too.

You can monitor the ECB balance sheet here.

For the Japanese balance sheet you must google it.

Brazil Doubles Gold Holdings in Two Months

Precious metals have been weak for the year of 2012 and investor sentiment is nearing an all time bottom, but I believe we haven’t reached bubble territory yet.

When roaming the precious metals forums, I found out that Brazil doubled its gold holdings in two months time (added 17.2 tonnes in October 2012 and 14.7 tonnes in November 2012. Total holdings now 67.2 tonnes), I just wanted to see if central bank gold buying correlated with the gold price.

And surprisingly, there is a correlation (Charts 1 and 2)! If you look very carefully, you will see that the price of gold goes up when central banks buy gold. For example from 1970 till 1976 we see a net positive buying of gold by central banks. That period was also bullish for the gold price. The same can be said for 1980. Then came a period where central banks slowly got rid of their gold from 1980 till 2002 and that’s a period where gold declined in price. And from 2003 onwards, central banks have slowly shifted from net sellers to net buyers again today.

Keep reading about this analysis here.