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On Friday, gold prices increased $17.10 per ounce while silver gained 49 cents. Despite volatile trading for the precious metals, both logged positive gains for the first quarter of 2012. Gold climbed about 6.5 percent and silver surged 16 percent. Both metals continue to receive support as countries around the world weigh financial fears. Reports of a new emerging market bank are highlighting concerns about troubled currencies.
Last week, World Bank President Robert Zoellick endorsed a new bank to be created by the top five emerging economies. The countries include: Brazil, Russia, India, China and South Africa. These five countries account for almost 30 percent of the global economy. The new BRICS bank will almost certainly rival the western and U.S. dominated IMF and World Bank. However, Zoellick said that not having Russia and China as part of “the World Bank system” would be a “mistake of historic proportions,” according to GoldCore.
One of the biggest developments that is likely to occur with the new BRICS bank is the promotion of the five countries to conduct trade in their own currencies, avoiding the U.S dollar as the global reserve currency. GoldCore explains, “The leaders of BRIC nations and other emerging market nations have adopted the idea of conducting trade between the five nations in their own currencies. Two agreements, signed among the development banks of Brazil, Russia, India, China and South Africa, say that local currency loans will be made available for trade between these countries.”
Trading in local currencies will also allow the BRICS to hedge their foreign exchange reserves against the uncertainties facing the U.S. dollar and euro. Many countries are already hedging by purchasing gold. According to the latest data from the World Gold Council, central banks purchased a net total of 440 tonnes of gold in 2011, compared to only 77 tonnes in the previous year. It was the largest amount of net purchases by central banks since 1964. Russia was a large buyer of gold, adding around 95 tonnes in 2011. Chinese official gold reserves numbers are not easily obtained, but some analysts believe the country purchased almost 500 tonnes of gold last year. In 2009, the People’s Bank of China confirmed that it had nearly doubled its gold reserves since 2004, after secretly purchasing significant amounts of the precious metal. With emerging markets increasing the use of local currencies and gold holdings, it is not outside the realm of possibility that some currencies may have some form of a gold peg or standard.
As the BRICS and other countries raise concerns about the currencies of developed nations such as the U.S. and Europe, it is hard to imagine that gold will not have a larger role with international trade. The Federal Reserve’s current zero interest rate policy is hurting the greenback and future quantitative easing programs will only add insult to injury. Meanwhile, the Greek debt tragedy is slowly coming back into the spotlight. Bloomberg reported Monday morning that investors in Greek bonds issued under foreign law did not accept recently made restructuring attempts. The closest maturity date on the international bonds is May 15, when holders of a 450 million-euro floating rate note are due payment. Greece’s inability to pay on the note could easily spark more euro zone fears, adding even more allure to safe-havens such as gold and silver.
Investor Insight: Should Investors Activate Gold and Silver Airbags?
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Disclosure: Long EXK, AG, HL, PHYS
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