What Central Bank Buying Means for Gold: iShares Gold Trust (ETF) (IAU)

Look, for instance, at the report. From 2003 to 2009, as gold prices were steadily and significantly rising, central banks sold a net total of 2,880 metric tons of gold, representing nearly a year’s worth of total demand during that time frame. By 2010, when governments became net buyers, gold had already risen to the $1,100 to $1,400 per ounce range.

Put another way, when you look at the cash flow at central banks based on gold value, you’ll find that over the past three years, central banks have spent $6.3 billion more to buy gold than they got from selling gold during the seven prior years. Moreover, even though they spent more money, they bought back only 1,069 metric tons of gold since 2010 — less than 40% of the amount they had sold previously. That doesn’t show good timing, and contrarian gold investors have to worry that central bank interest is as much a sign of a reversal as it was when central banks sold near gold’s lows in the 1990s.

What to do
Having exposure to gold makes sense in a low-interest-rate environment in which the costs of carrying nonproductive bullion are relatively small. With mining stocks having done badly over the past year, however, the potential for both share-price appreciation and possible dividend income from owning high-quality gold miners individually or through exchange-traded mining-company vehicle ASA Gold and Precious Metals Ltd (NYSE:ASA) and similar funds looks more compelling than bullion — regardless of whether central bank buying turns out to be an ill omen going forward.

The article What Central Bank Buying Means for Gold originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.