Central Banks Buying Gold: What Happens Next?
The move by the world’s central banks to replace dollars with gold is one most important financial trends of our time.
Our friends and regular readers know we think it is of vital importance: we have written about it many times and tracked the stunning increase of gold in central bank vaults.
(For example, see comments here, here, and here.)
We have recommended our clients take advantage of this clear megatrend before it becomes widely recognized and prices begin to move up exponentially.
Former Reagan budget director David Stockman sees the same risk: that Wall Street and hedge fund professionals will suddenly take notice and begin front-running the central banks in the gold market. That means that, being assured of more gold buying, they will buy ahead of the Fed. Front-running the Fed in one market or another has been Wall Street’s primary activity for decades now; it is what they do. For years Wall Street has been shielded from losses and guaranteed profits by Federal Reserve liquidity policies. Someone even coined the phrase “the Greenspan put,” for the Fed’s implicit willingness to manipulate interest rates to protect Wall Street from a stock market downturn.
With changing Fed chairmen The Greenspan put morphed into the “Bernanke put” and then the “Powell put.”
It was that policy, the Powell put, that kicked in last year when Chairman Jerome Powell suddenly reversed the Fed’s tightening policy in favor of more money printing. He was protecting the stock market. In the same way the Fed has spent almost 40 years manipulating interest rates lower to protect the bond market.
In any case, Stockman, a long-time Wall Street professional after leaving the Reagan administration many years ago, thinks that a light will go off and Wall Street will begin trying to front-run the world’s central banks, buying gold before the world’s global governments bid prices higher.
We’ll let Stockman speak for himself. What follows is from a recent interview he gave to Doug Casey’s International Man newsletter:
“I think that intelligent people can see that this system of balance sheet expansion and interest rate repression—and $17 trillion in bonds trading with sub-zero yields a few months ago—isn’t sustainable.
“Some central banks at least are trying to hedge their bets by reallocating their balance sheet to have a larger share of gold. As the crisis of what I call ‘Keynesian central banking’ becomes more and more intensive and acute, more central banks will be buying gold.
“Gold has a small trading value, or market cap, compared to something like a trillion dollars that turns over in the repo market every day. Or the five trillion dollars a day that turns over in the currency markets. Gold is a minor player, compared to that.
“If central banks begin to really stock up on gold, what’s going to happen is people will try to front-run them.
“This is the whole secret of what’s been ongoing for the last 20 years in other markets. The reason bond yields have gone to rock bottom is the central banks have been buying the bonds. So, the smart traders are buying what the central banks are buying.
“If the central banks are going to start buying gold, the same guys who have been buying the 10-year Treasuries or Bunds are going to start buying gold, and it’ll soar. The same way that bond prices have in last few years.
“In other words, the world is awash with massive artificial liquidity created by the central banks. It’s in the hands of traders, who move in split-second intervals and attempt to leverage anything that looks like it’s going up. Especially if they can put it on leverage that costs nothing.
“Maybe the next chapter is the whole system becomes unwound and the banks start buying more gold, and the frontrunners start buying more gold, and the price begins to multiply by breathtaking rates.”
Stockman has described a market prospect that it not only reasonable, it is very likely. To “front-run” the Wall Street central bank frontrunners, speak with a Republic Monetary Exchange professional today.