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Matthew Lynn's London Eye Archives | Email alerts
March 28, 2012, 12:01 a.m. EDT
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By Matthew Lynn
LONDON (MarketWatch) "” Has the great bull run in gold run its course?
On the surface it looks as if it might have. After running up close to $2,000 an ounce during the market panic of last autumn, it has slipped below $1,700. And it shows little sign of reclaiming its highs.
But here's one reason why it could have a lot further to go.
The big, developed world central banks will start buying again. And if they do, it would put real rocket fuel into the price of the precious metal.
In his budget last week, British Chancellor George Osborne caused a small flurry in the markets with a line that suggested the Bank of England might start stockpiling gold. The U.K. Treasury quickly denied it, saying that he had just been talking about reserves in general, rather than gold specifically.
But in fact, Osborne was onto something.
The developed world central banks should all be increasing their reserves dramatically. The best way would be by refilling their vaults with the precious metal.
In his speech, Osborne said that he planned to increase Britain's reserves, something most developed countries have not worried about for the best part of three decades. They are certainly in a sorry state. For a major developed economy, the U.K.'s reserves are laughably tiny.
Under the previous prime minister, Gordon Brown, the country sold off a lot of its gold right at the bottom of the market. Its total reserves now amount to just $46 billion. That is up a bit from the $34 billion they stood at when the new government took office, mainly because of the increase in the value of its gold holdings and also the extra deposits committed to the International Monetary Fund.
But the U.K.'s hoard of gold and foreign currency is dwarfed by China's reserves, which currently stand at a towering $3.18 trillion, as well as by Japan with $1.2 trillion, and by Saudi Arabia with $500 billion.
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In common with most developed countries "” Japan excluded "” the U.K. has no reserves worth speaking of. In truth, what is interesting is how low the reserves held by all the developed nations now are. Switzerland is the only European country with significant reserves, with $340 billion squirreled away, whilst Germany has $257 billion, and France has $172 billion. The U.S. only has $148.5 billion, although when you can print the world's reserve currency maybe that doesn't matter so much. Overall, however, it is only the emerging nations that have built up significant cash piles.
But, as Osborne hinted, they need to think about raising them. He probably isn't the only finance minister to be planning on stockpiling more assets. Even if they are not talking about it yet, others will have the same plan.
Here's why.
First, foreign exchange reserves are critical if you face a financial crisis. If the banking system needs to be propped up, then you need some assets to play with. Of course, the central bank can always print some money. But in a crisis, the markets may demand something more solid "“ and that means having reserves.
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