Central banks are gobbling up gold like there’s no tomorrow. Indeed, on March 26, one media outlet says a major bank sees the yellow metal at $3500 on central bank and China buying. Higher prices are possible, but beware when central banks turn to trend-following, as pointed out by this excerpt from Robert Prechter’s landmark book, The Socionomic Theory of Finance:
Despite the huge and theoretically unlimited buying power of governments’ money-creating monopolies, their buying and selling of gold has in fact been inversely related to the metal’s price trend. Central banks’ persistent selling of gold from 2000 through 2009 occurred as the metal rose five times in value; their neutral stance of 2009-2010 saw gold double; their rush to buy in 2011 caught the top of the market; and their persistent buying has continued throughout the bear market to date [April 2015]:
As a market analyst, I have no trouble explaining this picture. As you can see from the headline in the chart, originally published in April 2015, I simply observed that central bankers are lousy investors. They act as naïve odd-lotters, who fight a trend until it ends and then join it.
The common-sense conviction that direct, heavy central-bank buying or selling of an asset would force its price to rise or fall is flat-out wrong. In real life, sometimes central banks’ interventions are in harmony with market trends and sometimes they aren’t. When the latter condition applies, central banks’ ineffectiveness is on stark display.
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Speaking of The Socionomic Theory of Finance, learn how financial markets really work by accessing Chapters 1 & 2 – FREE.