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Central Bank Buys Gold, Sells DollarViews: 1664
Mar 17, 2007 5:25 pmCentral Bank Buys Gold, Sells Dollar#

Central Bank Buys Gold, Sells Dollar

Yesterday Bloomberg reported that Qatar (base for the U.S. military HQ for the assault on Iraq) "tripled its gold reserves in January from the previous month to protect against a weakening dollar."

At some $43.3 million this is not a major transaction. However, it is a major event in that we believe it represents the start of a major trend - where central banks start to diversify out of the U.S. dollar not only into the euro, but also into gold.

This announcement follows news that Russia also increased its gold reserves by some 2˝ percent.

When nations with massive reserves (like China and Russia) start to buy gold as part of a diversification policy, we feel that gold will be pushed higher and higher.

This comes at around the same time as two other significant announcements regarding gold.

On Mar. 7, the South African Chamber of mines reported a fall in gold production of some 8 percent in 2006 to 84 year lows.

South Africa is the world’s largest gold producer. But its fall in production follows gold production declines in Australia, Canada, Peru, Russia, and the United States.

From a peak in 2001, of 2,604 metric tons, world gold production has fallen to 2,467 metric tons. In short, world gold production has fallen by some 4˝ million troy ounces over the past five years.

[Editor's Note: Jim Rogers Predicts Huge Profits in Commodities]

On Mar. 13, Axel Weber, the President of the Bundesbank, announced that his central bank "planned no substantive sales [of gold] in the current year of the central bank gold agreement (CBGA) and has made no firm decision for next year."

This goes to support our view, expressed in past editions that the CBGA is cracking up.

This is important because the CBGA is an agreement between certain major governments to diminish "investor" demand and so distort the price of gold to the downside. This was achieved by means of a concerted effort to "dump" large amount of gold by means of a massive annual and coordinated program of central bank sales of gold, though the IMF.

These recent announcements are given little coverage in the media. However, we feel they are important indicators in the "foothills" of a possibly "mountainous" increase in the price of gold in coming months.

The fact that some CBGA member banks now appear to be losing their appetite to sell off their gold reserves, will reduce politically motivated government distortion (to the downside) of the so-called "free market price" of gold and will have a fundamental upward influence on the price of gold.

The news that certain central banks have now crossed the "political hurdle" of publicly declaring their diversification out of U.S. dollars in favor of gold is likely to spread and to exert a strong "psychological" and even "actual" upward pressure on the increasingly "free" market price of gold, for which the supply of "mined" gold is now falling.

[Editor's Note: Four Gold Stocks Set to Skyrocket in 2007.]

We would even go as far as to suggest that a true market price for gold, free of both politically motivated and massive central bank sales and even of central bank buying, will soon open the way to a truly free market for gold and a price of well above $2,000 per troy ounce.

Such a rise in the price of gold could cause severe problems to those so-called "bullion banks," who have engaged heavily in what is known as the "bullion carry trade." Indeed their "covering" will add yet a further upward price influence.

Doubtless, the U.S. Treasury will provide funding if the problem threatens any major bank solvency. In the meantime, there could be some scary moments.

We continue our recommendation that our conservative readers should include gold in their portfolios.

Editor's Notes:
Why the Dollar Will Crash and Gold Skyrocket This Year.

Double or Triple Your Money with Our Nine Best Energy and Precious Metals Stocks

Special Report: Jim Rogers Predicts Huge Profits in Commodities

4 Supplements Can Extend Your Life!

Buffett: I'm Betting Billions on a Falling Dollar

Dont Let Nasty Bacteria Take Over Your Stomach: Fight Back!

Special Report: Four Gold Stocks Set to Skyrocket in 2007.

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