St. LOUIS () -- Yesterday, gold closed at $502.50/oz in New York and gold bulls rejoiced. seem to think this is just the beginning of the rally. Resource Investor asked Peter Grandich, Editor of The Grandich Letter, what would happen to the gold market if central banks in Asia decided to follow the recent trend and increase their gold reserves?
"The talk of Asian central banks increasing their gold holdings is a very real possibility," said Grandich.
In the last two months, Russia, South Africa and Argentina all decided to increase the amount of gold in their reserves, reversing a six-year trend of central bank sales.
At the in mid November, Russia's head of external reserves management gold reserves as a proportion of all reserves may be doubled from 5% to 10%. Even though Guegina's colleagues have since repudiated this assertion, Russian President Vladimir Putin has said that the Central Bank of Russia should "pay more attention" to gold while forming the country's foreign exchange and gold reserves.
, head of South Africa's central bank Mboweni said that South Africa might increase its gold reserves, noting that central bank had been increasing its foreign exchange reserves at a measured pace and there was no reason why it could not boost gold holdings.
And , Juan Ignacio Basco, head of market operations of Argentina's central bank, said the Argentine bank might increase its gold reserves as a hedge against inflation and to protect it against financial crises.
According to International Finance News, central banks of Asian countries including China are expected to further increase their gold reserves in the near future. It is only a question of time for Asian central banks to follow and buy gold.
Asian central banks hold $2.6 trillion in foreign exchange reserves and may wish to change more of them into gold as a hedge against a decline in the U.S. dollar.
According to the article, "the U.S. dollar will inevitably slip further. Some budget deficits of the seven major industrial countries are at a record level, and central banks are 'printing banknotes' to devalue their currencies. Huge amount of budget deficits and debts in Europe, America and Japan will finally force them to increase real interest rates in an effort to drag economies back to the right track. This means slower growth rate and lower prices of stock, bond and real estate as well as faster increase of inflation - a golden opportunity for central banks to buy in gold."
The banks are "literally overflowing with U.S. dollars and up to their ears in U.S bonds, it's a very logical and prudent move to diversify into gold," said Grandich.
Asian countries have good reasons to hold more gold, according to the article. Compared with developed countries, their percentages of gold in foreign exchange reserves are apparently small. And, as the World Gold Council points out, Asian investors are the world largest gold consumers.
Gold only takes up 1.1% in China's official reserves, 1.3% in Japan and 3.6% in India respectively. A sharp contrast is the American percentage of 63.8%, and over 50% in Germany, France and Italy respectively.
"The surprise could be how much they actually acquire. If and when this happens, it's the death warrant for the groups who have been attempting to cap the gold price," Grandich concluded.
Philip Klapwijk, chairman of London-based consultancy GFMS and a director of the Global Precious Metals Fund, was quoted in an article in Economic Times saying this move could be explosive.
"Just a hint of Asian central bank buying would set the gold market on fire," said Klapwijk. "That's going to be explosive," he added.
We will see.