What does it mean when central banks start buying gold?

South Korea's central bank purchased a substantial amount in the past two months, which could mean that inflationary policies are more likely

Truth Leem / Reuters
An employee holds replicas of turtles made of gold during a photo opportunity at a jewelery shop in Seoul on Aug. 2, 2011. Gold edged higher on Tuesday, supported by a purchase of 25 tonnes of the precious metal by South Korea's central bank. The fact that central banks are buying gold is bullish, writes guest blogger Stefan Karlsson.

South Korea's central bank, the Bank of Korea, bought 25 tonnes of gold at a value of $1.24 billion during the last two months. This is one of many examples of how central banks these days a lot more often buys gold rather than selling it in the past. In hindsight it would have of course have been a lot smarter to buy in the past and sell now rather than the other way around (Gordon Brown's infamous gold sale when gold was at $250 per ounce won't exactly go down in history as a wise move), but that doesn't necessarily mean that it is wrong to buy now.

The fact that central banks are buying gold is in fact bullish for two reasons. First of all because these purchases means directly that demand is higher. And secondly because that makes inflationary policies look more likely as central banks will profit from higher gold prices. This means that the purchases could be a signal that central banks intends to create more inflation and it also increases the likelihood that they will later create more inflation.

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