Gold and central banks - don't follow their strategy

The FT provided a good graphic on gold holdings for central banks. The story shows that from the highs during the inflation period of 1980 there has been a consistent policy of selling off gold reserves and increasing foreign exchange holdings. Now this was the period of falling inflation and and declining gold prices so it did make simple sense. The assumption was that central banks could control inflation around the world and that they would have the wisdom not the inflate their money supplies at the same time. One central bank may not follow this wisdom but there was little likelihood that all central banks would increase fiat money at the same time. Under that scenario, holding a paper asset would not make sense. But that could not happen.

Now in 2009 we have found that inflation could be a problem. In fact, there is talk that inflation could be the solution. Under this world , holding gold might be a better strategy. Of course, now we are seeing some central banks getting back into the gold market to increase their gold reserves. We see that with China and with discussion in the Middle East.

Crises occur, but not expecting inflation may be the bigger problem facing the world over the next few years. It is the black swan event thay central bankers really did not expect.