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Behind Central Banks' Gold Buying: Opinion

There is also a very long list of supply/demand arguments which clearly favor gold over (near-worthless) banker paper, but that would simply be overkill.

Lastly, do we have any reason to believe that gold is significantly undervalued vs. the bankers' paper currencies?

Yes. Even if we embrace naivety and conclude that the thousands of tons of gold dumped onto the market by Western central banks was not intended to suppress the price of gold, as any first-year economics student could tell you it would inevitably have that effect.

With the gold-dumping having not only ceased, but reversed, again the basic dictates of supply and demand tell us that the price of gold has only begun its advance. This is especially true once we factor in how much further the bankers have diluted their paper currencies during this bull market for gold. Indeed, once we also calculate the exponential increase in debts and the equally exponential rate of currency-dilution, in absolute terms gold is clearly more undervalued today than when the bull market began more than a decade earlier.

Big Picture

When we combine the WGC data with the basic fundamentals of the gold market, a clear picture emerges. While Asian markets are strong, gold remains almost a complete mystery to Western investors. Proof of this comes in any historical comparison. Traditionally precious metals assets have constituted between 5% and 10% of financial holdings -- and more than that in times of crisis.

Yet today, with Western economies currently sinking into a combination of economic depression and debt-default, we see Western investors with (on average) only 1% of their portfolios comprising bullion and other precious metals assets (i.e. mining shares). To suggest that gold-ownership (and silver-buying) in the West is likely to increase by a factor of 10 (or more) in the near future would seem to be a conservative estimate.

Meanwhile, central banks are dumping their own paper for gold at a pace which is unprecedented since Nixon assassinated the gold standard in 1971. It is harder to imagine a clearer warning.

For the sake of all regular readers who (proudly) call themselves "silver bulls," I'll take a moment to observe that not only do we have many reasons to believe that silver is even more undervalued today than gold, but as "the peoples' money" it is also much more affordable.

Protect yourselves from the collapse of the paper currencies that even the creators of this paper are trying to dump themselves. Swap your banker-paper for gold and/or silver today -- before this confetti (officially) acquires its actual value.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
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