Central Bank Buying of Gold at 40-Year High

It really is saying something when the purveyors of the world's paper currencies – the world's central banks – are busily buying gold at a nearly unprecedented rate.

They seem to not believe in their own product – paper money.

The stunning headline, from the World Gold Council, is that central bank gold buying is at a 40-year high.

Central banks only became net buyers of gold last year after two decades of heavy selling.

Central banks made their largest purchases of gold – a net 148.4 million tons – in decades in the third quarter of 2011. The banks took advantage of a sharp drop in gold prices in September.

The World Gold Council declined to identify the central banks doing the buying. It said only that “a slew of new entrants emerged wishing to bolster gold holdings”. You can bet that most of the new entrants were emerging market central banks looking to diversify away from the U.S. dollar.

Marcus Grubb, head of investment at the World Gold Council, forecast that central bank buying for the full year could be 450 million tons. This implies a further 90 million tons will be purchased in the fourth quarter of 2011.

Do not be surprised if the total purchased for the year comes to 500 million tons. The people in the emerging markets are not fools...they see the how the U.S. and European economies are “burning” while the politicians are “fiddling”.

In addition to buying physical gold (the best method), investors can also exposure to gold through the use of exchange traded funds (ETFs) such as the ETFS Gold Trust (NYSE: SGOL).