Central Banks to Keep Investing in Gold - as Should You

Up until gold's recent plunge, there was a major story that had captured the attention of everyone investing in gold.

That story was the massive purchases over the past year or so of the precious metal by many of the world's central banks.

According to the World Gold Council, the world's central banks have been net purchasers of gold since the second quarter of 2009. Since the financial crisis central banks, particularly in emerging economies have sought to diversify away from the U.S. dollar to a safer long-term asset.

In 2012, central bank purchases hit a 48-year high. Central banks bought 534.6 metric tons of gold (about 15 million ounces) last year. This was 17% more than in 2011 and the most purchased since 1964. The biggest buyers were the BRIC countries of Russia and Brazil.

With the recent turmoil in the gold market, investors worried that these central banks would turn away from gold.

But according to Money Morning's Chief Investment Strategist Keith Fitz-Gerald, central bank buying will continue.

In fact, he believes that the amount of gold bought by central banks this year will easily double, led by central banks from the developing world.

The answer is a key factor on why to keep investing in gold in 2013.

Why Central Banks Still Favor Investing in Gold

Central banks have definitely lost money during gold's recent tumble.

The World Gold Council says that the world's central banks own nearly 31,700 metric tons of gold. With a drop of 28% from gold's September 2011 high of $1,923.70 an ounce, it is estimated that central banks globally have lost approximately $560 billion on the value of their gold reserves.

Bloomberg News reported that South Africa Reserve Bank Governor Gill Marcus said that the drop in the gold price is "extremely concerning." But he also said his country, which holds over 125 tons of gold, will not adjust its reserve policy.

And the Bank of Korea, as reported by Bloomberg, called the fall in the gold price is "not a big concern" since its gold holdings are part of its long-term diversification strategy.

Central banks have diversified away from the U.S. dollar into other currencies, but mostly into gold. And those policies will remain in place for the foreseeable future as gold does not have any credit risk associated with it, unlike sovereign bonds.

Official reserves of the world's central banks grew from a mere $2 trillion in 2000 to more than $12 trillion in 2012. Yet, data from the World Gold Council showed that the U.S. dollar's share of those reserves dropped from 62% in 2000 to 54% last year.

And these central banks would not change their investment strategies based on short-term market movements.

Some central banks see the gold price decline as a buying opportunity.

Central Bank of Sri Lanka Governor Ajith Nivard Cabraal said the selloff provided a wonderful opportunity for the bank to increase its holding of gold. This fits right in with what Fitz-Gerald pointed out about the attitudes of emerging markets' central banks.

What This Means for You

What all of this means for investors is simple: Follow what the emerging market banks are doing by investing in gold.

Continue to accumulate gold (Fitz-Gerald recommends dollar-cost averaging) as Wall Street short-term momentum traders drive down the price. Consider it a gift from Wall Street.

As Money Morning Global Resource Specialist Peter Krauth said recently about gold: "It's an important holding. It's the best insurance you can find against government stupidity. Gold has an intrinsic value and can't be devalued by overprinting. It's sure to rebound because. . .governments around the world will continue to do stupid things. The gold bull market isn't over. . .not by a long shot."

Finally, a little added perspective as why you should not panic and sell gold like Wall Street wants you to: Since October 2007, gold is still up about 100%, while the S&P 500 index is up roughly 1%. And since March 2000, the S&P 500 index is up about 2% while gold is higher by more than 440%.

For Keith Fitz-Gerald's full analysis on what's going on in the gold market, and why you should be investing in gold, read this: Why Gold Really Crashed and What You Can Do About It

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