The Real Reason Behind Brazil Buying Up Gold

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November 30, 2012 2:45pm NYSE:AGOL NYSE:GLD

Tony Daltorio: Money Morning Global Resources Specialist Peter Krauth stated in his 2013 gold price forecast that the yellow metal was headed to $2,200 an ounce next year, with one of the main price drivers being the increased rate at which central banks are buying gold. 

As a group, central banks will have bought about 500 tons of gold this year, the most in more than 40 years. More large purchases are expected in 2013.

Foremost amongst the gold buyers are the central banks of emerging economies around the globe. Recent years have seen purchases by Russia, South Korea, Mexico, India and, as most believe, China.

Another country joining the party, or in this case the carnival, is Brazil.

According to the International Monetary Fund, Brazil raised its gold reserves for the second month in a row in October. Brazil made its first significant gold purchase in more than a decade in September. It expanded its gold holdings by a hefty 17.2 tons last month to 52.5 tons.

This is the largest amount of gold Brazil has held in more than 11 years, since January 2001.

So why is Brazil jumping aboard the bandwagon now and buying gold at a record pace?

The Real Reason Behind Brazil Buying Gold

It’s all part of the so-called currency war, a term coined by Brazil’s finance minister, Guido Mantega. He first used the term two years ago when the Federal Reserve launched QE2.

Even just a few short months ago, Mantega called the Fed’s latest QE3 salvo a “protectionist” move by the United States in an effort to cheapen its currency at the expense of others around the globe. The various rounds of QE have led to much volatility and punishing appreciation of many emerging market currencies among them the Brazilian real.

As part of conducting the war since 2008, Brazil has attempted to fight the appreciation in the real by buying U.S. dollars. In the course of doing so, it has accumulated about $132 billion, the world’s sixth-largest reserves.

Roughly 80% of the reserves are denominated in U.S. dollars. And, as of the end of 2011, only 0.8% of its reserves were not in the form of government bonds or other bonds and bank deposits.

An economist at the Sao Paulo consultancy Tendencias, Silvio Campos Neto, told the Financial Times, “The dollar has its problems because of monetary easing policies and fiscal uncertainties that will also exert a certain pressure on the currency, so it’s natural the country [Brazil] is on the lookout for other types of assets.”

That line of thought is apparently what Brazil’s central bank is thinking, too. In June, it issued a report stating it would seek “a greater diversification of international reserves.”

Translation: sell dollars for something that would lend stability to its reserves, something that has proven itself over time as a preserver of wealth.

That something, as other emerging economies have found, is gold. Look for the trend of emerging market central banks buying gold to continue unabated in 2013.

For investors looking to follow this trend, an easy way to track gold prices is through the use of an exchange traded fund.

The SPDR Gold Trust (NYSEARCA:GLD) holds more than $75 billion in assets, second only to the SPDR S&P 500 ETF (NYSEARCA:SPY). Worldwide, investors in ETFs and similar products have pushed their gold holdings to more than 83 million ounces, according to ETF Securities.

Related: Physical Swiss Gold Shares (NYSEARCA:SGOL), Physical Asian Gold Shares(NYSEARCA:AGOL), iShares Gold Trust (NYSEARCA:IAU).

Written By Tony Daltorio From Money Morning

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