Why governments are buying gold

Posted by Aaron Rowe - Commodity Online

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A lot of questions are swirling the globe today about why governments are buying gold bullion and what this means when it comes to the US dollar? Should Americans be running to their nearest gold dealer and buying what they can because the end is near? Or is buying gold, or maybe silver and other precious metals, a wise choice as an investment?

In the first quarter of 2011, the Mexican government had amassed nearly 100 tones of gold bullion causing metal experts to turn their heads and take notice. Mexico has not been the only country to build up its reserves of the precious metal. China, India, Russia, Kuwait, Saudi Arabia, all have added gold to their coffers. Why are they doing this? What does gold give them that other investments do not?

There is more to this story than the idea that countries are buying gold to prepare for an impending collapse of the US dollar. Global economics is far too complicated for a one-sided scenario such as this one. Countries like Mexico, China and others are developing and buying gold to diversify their exports to developed markets like the United States and Canada.

With a growing horde of gold, Mexico for example, can manipulate its currency and downgrade it in order to increase exports to the US, its largest trading partner. Britain, Canada, Japan, and other developed countries have smaller gold reserves and rely on their currencies for economic strength.

This is not necessarily the safest way to secure a nation at this point in time because of the debt problem in America. Also, the continuing insistence on the Keynesian policy of printing money to support capital markets and failing financial institutions puts the economy on unstable ground.

Another reason for an increase in gold holdings for a central bank is often due to decreasing confidence in the economy or a negative outlook on the strength of either the local currency, or the US dollar. The US dollar, given its status as the reserve currency of the world, is generally a concern for all countries, and its something that central bankers around the world are watching very closely.

A little history of gold buying may help to understand why countries may want to increase their reserves and what happens to those who do not. During the tech boom of the late 1990s, gold was referred to by names such as, “a thing of the past,” and “a barbarous relic.”

In early 2011, people and governments alike are singing a different tune. In the first quarter of 2011, the central bank in Mexico picked up 93.1 tonnes of gold, increasing their reserves 1300% (up from about 7 tonnes). In Canada on the other hand, despite running one of the most respected mints in the world, the government only holds 3.4 tonnes of its reserves in gold.

It is interesting to look at these figures on a per capita basis. One tonne of gold contains 32,150 ounces. There are about 107 million people in Mexico and about 34 million people in Canada. Given these numbers, Canada has in its reserves approximately 0.0032 ounces of gold for every person. Mexico on the other hand holds approximately 0.03 ounces per person. Both of these numbers seem shockingly small, but it is interesting to note that on a per capita basis, Mexico holds approximately ten times the amount of gold that is currently held by Canada.

Simply put, the current state of gold buying and trading is that developing countries buy the gold and the developed countries sell it and rely on paper money. It is a great historical irony that in the 16th century, Hernan Cortez came to Mexico and stole the gold from the Aztec empire.

Spain continued to loot the country of its gold and silver reserves over the centuries leaving it at the economic mercy of its American neighbours. Maybe now is the time that Mexico reclaims its lost fortune?Courtesy : EzineArticles.com