By Grant Williams Vulpes Precious Metals Fund

August 20 (King World News) - Why The Next Mania In Gold Will Be Parabolic

Looking back on it now, the Cold War was more Ali vs. Cooperman than Batman vs. Superman; but at the time, the world lived in fear of a cataclysmic resolution to the conflict. It seems like a lifetime ago; but those years between 1946 and 1991, when communism finally gave up the ghost, were fraught with fears over a rogue USSR.

Throughout the entire episode, the price of gold — the ultimate barometer of fear — performed as one would have expected it to — once Richard Nixon removed the shackles on August 15, 1971, of course.

During the 1980s and 1990s, Asian central bank reserves (particularly gold reserves) were nothing to write home about....

Continue reading the Grant Williams piece below...


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Thanks to the IMF and the World Bank, we can see exactly what they were:

As you can see, the huge run-up in the gold price during the 1970s occurred against a highly inflationary backdrop and the ongoing Cold War; but, crucially, WITHOUT THE PARTICIPATION OF ASIAN CENTRAL BANKS. (The IFC — part of the World Bank — classifies “East Asia & The Pacific” as China, Indonesia, Japan, Laos, Mongolia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, as well as the Pacific Islands).

If we switch our focus to those same countries’ total reserves, however, a completely different story emerges. From the mid-1990s onwards, total currency reserves soared from $300 billion in 1994 to $5.8 trillion by the end of 2013.

That relentless climb has given Asian nations two things they didn’t have the last time we saw gold being chased higher by the terror of surging inflation and the spectre of a large-scale conflict between opposing blocs: extraordinary purchasing power and the need to diversify their massive holdings of US dollars.

If we throw India into the picture (India is classified as part of South Asia by the IFC/World Bank, along with Bangladesh, Bhutan, the Maldives, Nepal, and Sri Lanka — countries we will leave out of this discussion for now), we can see a microcosm of that build-up in purchasing power laid out very clearly indeed:

But there’s one more vital piece of this puzzle that we need to throw into the mix before we try to reach any conclusions. And that, of course, is the actions of our old friends the central banks.

Take a look at the chart below:

Notice anything strange?

After the London Gold Pool collapsed in March 1968 and the metal was finally allowed to find its own market price (stop sniggering at the back), central banks slowly built up their reserves again before beginning to sell.

And continuing to sell.

From the end of Q2 1974, central banks sold gold bullion into the market remorselessly as the price soared. They represented by far the biggest supply to the market during this time; and while it makes sense to steadily sell something into a rising market, in times of escalating tensions the normal response is to buy and hoard gold. Selling it? Well, that would just help depress the price, surely?

One has to wonder what price gold might have reached had the central banks not been so magnanimous as to reduce their holdings during that period.

Anyway, reduce them they did — right up until the fall of communism and the end of the Cold War.

Then once the Cold War was over they sold even harder.

With no further threat from those darn commies, central banks were finally able to sell could step up the pace at which they sold their gold. Between December 1991 and September 1999, central bank gold holdings fell 6% — or roughly 68 million ounces — that’s roughly 1,900 tonnes.

Then, on September 26, 1999, Österreichische Nationalbank (Austria), Banca d’Italia (Italy), Banque de France (duh), Banco de Portugal (easy), Schweizerische Nationalbank (Switzerland), Banque Nationale de Belgique (Belgium), Banque Centrale du Luxembourg (no clues), Deutsche Bundesbank (remember them?), Banco de España (that’d be Spain), Bank of England (...), Suomen Pankki (tough one... clue: sharks have them), De Nederlandsche Bank (Holland and the Netherlands are the same country, apparently), Central Bank of Ireland, Sveriges Riksbank (clue: flat-pack furniture), and the European Central Bank all signed the Washington Agreement on Gold.

This agreement created a cartel of central banks that controlled the majority of the gold market “limited” gold sales to 400 tonnes a year amongst the signatories and was intended (so they said) to “ease pressure” on the gold market after Gordon Brown’s ridiculously suspicious or, at best, childishly naive brilliantly conceived announcement of upcoming sales of the Bank of England’s gold, which pushed the price to generational lows.

In fairness, you have to admire the scheme….”

King World News note:  Just remember that when the next mania in gold and silver comes there will potentially be billions more people chasing the gold and silver prices higher.  This is part of the point Grant is making and it should create a final move for that will be read about in the history books. For those who may have missed it, this was just a small portion of a lengthy and informative piece by Grant Williams which was recently published at John Mauldin’s site and you can read the entire piece by CLICKING HERE. 

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