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Will Central Banks Prolong the Gold Rally?

By Marcus Holland of FinancialTrading.com

NEW YORK ( TheStreet) -- It's no surprise that SPDR Gold Shares (GLD) rose 1.3% last week in response to news about the German and Japanese central banks.

After all, gold prices have been rising for more than five years as Federal Reserve Chairman Ben Bernanke and other central bankers around the world have responded to The Great Recession with inflationary monetary measures.

I am expecting the GLD exchange-traded fund to continue surging in the long term due to these policies. Overall, the world's central banks increased the holdings of gold in 2012 by 17% to 536 metric tons. In addition to reducing the supply of gold, central bankers have greatly increased the amounts of fiat currencies. No mystery as to what happens next: Gold should continue to increase from basic supply and demand factors. (For more on gold and gold prices, see FinancialTrading.com.)

It turns out this was the biggest addition to government stockpiles of gold in 48 years. It was also the first time in decades that central banks were net buyers of the yellow metal. In 2013, analysts estimate another 280 tons of gold will be purchased by central banks in just the first six months. This is a nice heads-up to traders from central banks that they will be buying large through July.

The most recent gift to precious metals speculators on how to bet was from Germany's central bank, the Bundesbank. It recently announced that it would be bringing gold home from the Federal Reserve Bank in New York. Eventually, the Bundesbank wants half of Germany's gold back home, a big jump from the present amount of 31%. That means 300 tons of gold from New York and 374 tons from Paris will be embarking on a one-way journey to vaults in Frankfurt.

Across the pond, newly released transcripts from Federal Reserve reactions to the exacerbating global economic crisis in 2007 were unsettling. U.S. officials such as Bernanke and Tim Geithner, then the president of the Federal Reserve Bank of New York, grossly underestimated the severity of the looming financial crisis.

In May of 2007, Bernanke declared that there were "good fundamental reasons to think that growth will be moderate," as The Wall Street Journal reported recently. By the end of 2008, the Federal Reserve was on a massive stimulus campaign to rescue the global economy with the first waves of trillions of dollars of asset purchases and the lowering of short-term interest rates to near zero. That also led to the surge in gold that continues today.
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