When the gold standard was in force, central banks internationally manipulated gold rates in order to protect their national currencies. The best example is the US, where only between 1913 and 1920 inflation rose by a stunning 98%, while the gold price remained the same. In 1933, when it became impossible to keep the same price, while the great depression ravaged the country, the citizens were obliged to sell all their gold for $20 an ounce and then the price of gold was promptly adjusted to $35 dollars an ounce. In this way, its price got in line with inflation. But then again its price was kept artificially low so that by 1970 with an inflation of 306%, the price of gold was still $35. To solve the problem, without having to pay foreign governments in gold, the US just abandoned the gold standard and allowed their citizens to buy gold on the free market.
These days, the control of the gold price by central banks is taking different forms. Central banks signed two five-year gold sales agreements, as a result of their decision to reduce their gold holdings given their current standing up against Euros and dollars. But not only that Germany and Italy - respectively the second and the fourth largest gold holders in the world - have not sold any gold at all, but the other central banks had not respected their quotas either. Finally, not only that all gold sales have virtually ended, but all the central banks, confronted with the decline of currencies in response to the global financial crisis, changed radically their plans, beginning to buy gold, starting with all their domestic resources.
Both previously, as large sellers, and now, as large buyers, central banks have played a fundamental role as regards gold rates. While formerly they succeeded to keep the gold price low by massive sales, now they are pushing it up by massive purchases. Given that they buy by the ton, the price can go up by even thousands of dollars. On the other hand, given that their only interest is to buy gold, without being hampered by profit making goals, but aiming only at hedging their reserves and, as such, surviving, there is nothing to stop them from buying as much as they can in the foreseeable future, except for the lack of supply. Both by the quantities they require and by their increasing the price, they may prevent retail investors to purchase gold.
At the same time, they may control gold by increasing inflation. Under the Bretton Wood agreement, central banks printing money undertook to have their currencies backed by US dollars. But with the huge debt of the US that has pushed the dollar value down, the Federal Reserve printed, for instance, 1 trillion dollars in just two years in order to cope. This is the surest way to increase inflation and weaken the dollar further and, consequently, the value of other currencies backed by it. But gold is a commodity as any other commodity. When the dollar value decreases, all commodities become more expensive, the oil and gold included, sellers expecting devaluation.
Therefore, either by buying gold to protect their currency reserves, or by printing currency to pay national debts, central banks actually control the price of gold.
Learn from professionals how buying gold can help you in times of recession.
Article Source: http://EzineArticles.com/?expert=Jack_Wogan
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