Why Do Central Banks Buy Gold?

Good morning. I will be traveling to Dallas with the first flight out of Newark this morning, so unfortunately I will be unable to give my live market comments.

But I wanted to still communicate my thoughts on an aspect of the precious metals industry, so I decided to address the question:

Why do Central Banks buy Gold?

In recent months I have been told by some Wall Street professionals that they believe gold fundamentals have deteriorated. Not to mention the Fed’s decision to raise rates in December last year. And adding to this thought process, are some Fed governor comments that more rate hikes are a possibility.

Those facts and other reasons convinced the Wall Street pros that staying short gold was the right decision in the short term.

After talking to a few gold traders Tuesday morning, and witnessing a gold short covering rally today to $1,119, I believe, that their costly strategy has been covered and eliminated. So some look to recover their losses by trading the oil market instead.

Short covering and the continued increase in ETF holdings have supporting the gold price of late, but what you don’t see behind the scenes are the Central Banks continuing to add to their current gold holdings.

Global debt and the devaluation of some world currencies gives the Central Banks all the reasons to adopt that strategy.

Recently, countries have turned their back on the U.S. by selling Treasuries, giving up on us because of our current massive 19 trillion debt problem that has exploded under the current administration.

Where will it end?

Entitlements and health care costs are out of control. And unless we address these problems we may witness the worst economic disaster this country has ever seen. Looking at the facts is a U.S. downgrade in order?

What’s in your safe deposit box?