We Haven’t Seen the Mania in Gold - Yet

We Haven’t Seen the Mania in Gold … Yet
by Sean Broderick

Even though gold has rallied for more than seven years, I don’t think we’re near the top. Sure, investors are scared. But I expect to see at least three other developments before we get to the mania phase.


The first development — Hoarding

The Central Banks will start hoarding their gold as fears of sovereign bankruptcy rise. Collapse of credit bubbles in Ireland, Spain, Greece and Portugal could lead to those countries defaulting. And Eastern Europe looks even worse.

Eastern Europe has borrowed $1.7 trillion from abroad, much of it on short-term maturities. It MUST repay — or roll over — $400 billion this year, equal to a third of the region’s GDP. Good luck!

So I expect at least one European or Eastern European country to go bankrupt in the next 12 months, and that will strike fear into the hearts of the Central Banks. Suddenly, they’ll want to prove that they have more gold than anybody. And they won’t sell.

If Central Banks stop selling, a significant source of supply would be taken off the market. In fact, sales are already declining: Central Banks sold 260 tonnes last year — down 113 tonnes from 2007.


The second development — Russia goes on a buying binge

Russia, which is battling to keep its currency from tumbling, is noisily adding to its gold reserves. First deputy chairman Alexei Ulyukayev recently told Reuters that his country bought $1.5 billion worth of gold in a week. The Russian added, “We are aiming to continue this tendency this year; we are buying gold.”

Russia’s central bank says it would like to hold 10% of its reserves in gold, which could take its inventory up to around 1,200 tonnes from 495.9 tonnes at the end of last year.


The third development — China jumps in with both feet

Finally, one other development I expect on the road to mania is that China, like Russia, will start buying gold on the open market for its own reserves. China’s foreign currency reserves increased 27% in the past year to $1.95 trillion, about 29% of the world’s total. The country already owns $696.2 billion in Treasuries, about 12% of the U.S.’s outstanding marketable debt.

China holds gold reserves of just 600 tonnes, worth only $18.62 billion. Experts say that Beijing’s reserves could easily go up to 3,000 or 4,000 tonnes.

Would that have a huge impact on the market? Bet on it!