Central Banks Buying Gold -- Bullish or Bearish Indication?


Central Banks around the world seem to be buying gold at record pace. In fact, Venezuela recently announced that it was even going to nationalize its gold industry. We hear reports about China and India, as well as central banks around the globe adding to their gold holdings.

However, can we really rely on the action of Governments to dictate the continuation of a trend, or is it rather an indication of the completion of a trend?

Historically, government action has reflected the direction of the market prior to their action, and either near the conclusion of the prevailing market trend that precipitated that action, or even after the trend has concluded. Studies have pointed out there were no exceptions to this fact, as this relationship has held EVERY TIME. Government legislation and central bank action has clearly fit this model.

The reason for this is that the government represents the last bastion of the "herd," and is always the last to display the "herds" trend and perspective. So, when you see government action, such as large purchases of gold, or large sales of gold, based upon prior studies of historical actions, you must assume that we are closer to the end of the trend than the beginning.

Specifically, regarding gold, Central Banks were unloading their gold positions at the last low in 2001. Remember that Great Britain alone sold half of its gold reserves that it had maintained for centuries at the prior bottom when gold hit its $253 low.

Now that we see Central Banks in a buying frenzy, what do you think that tells us?

I am not saying the trend is over, as my analysis does show one more parabolic rally that is going to start around the corner -- after this last drop in the PM market -- but that will most probably end the multi-decade trend.

Since mass emotion and psychology are ultimately what move markets, governments and their agencies are the most representative group of the final stages of the mass psychology, and usually the last movers within the herd, since they are the ultimate final trickle down link within the herd. Therefore, their movements will usually represent the final movements of the herd before the herd changes direction.