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There are few better medicines for a struggling economy than a weakening of its currency – something that hasn't gone unnoticed by central bankers. But even as the U.S. Federal Reserve talks down tapering and the European Central Bank cuts its policy rate, providing ample fuel for currency retreats in so doing, they must be aware that the gold market is working against their cause.

Gold is a de facto reserve currency, and as such trades heavily against the world's other reserve currencies – primarily the U.S. dollar and the euro. The central banks can talk up currency-depressing monetary policies all they want, but they are competing in a market that is busy selling gold in favour of other currency alternatives.

The World Gold Council, an international organization for the gold industry, on Thursday reported that third-quarter gold demand fell 21 per cent from a year earlier – led by a precipitous 56-per-cent plunge in net investor purchases of bullion. Exchange-traded funds, a critical source of investor demand, were net sellers of 119 tonnes of gold in the quarter, the third straight quarter in which ETFs have unloaded bullion, totalling nearly 700 tonnes of gold dumped on the market by ETFs for the year to date. (To put that in perspective, total net gold demand from all sources for the year to date, including investors, jewellers, industrial users and central banks, was 2,805 tonnes.)

With that sort of downward pressure from the investment community, it's little wonder that gold prices have slumped 23 per cent since the start of the year. It also helps explain the nagging upward pressures on both the euro and the U.S. dollar during the year, even at times when central bank policy has leaned more toward prolonged low rates that would normally discourage buying – gold sellers appear to be switching into the big currencies despite the slowing rate outlook. The euro has risen more than 2 per cent against a basket of major foreign currencies in the past two months, even as ECB rate cuts went from increasingly likely to full-blown reality. The greenback is up more than 2 per cent since late October, when the Federal Reserve signalled it was retreating from tapering its quantitative-easing program.

Mind you, if the Fed and ECB are frustrated so far that their looser policy signals aren't giving them a break in the currency market, they can't point the finger too aggressively at other gold investors; central banks themselves have played a part in the decline in gold demand. Net purchases of gold by central banks for the first three quarters of 2013 are down 25 per cent from a year earlier. The Fed has not added to U.S. gold reserves in eight years; gold's share of the Fed's total currency reserves has fallen to a four-year low this year. The ECB hasn't increased its gold reserves since early 2010, and gold's proportion of total reserves have dipped to a three-and-a-half-year low.

With the Fed and ECB both running out of policy levers to reinvigorate their stalling economic recoveries, perhaps it's time for them to become gold buyers again. Lord knows the price is right, and both now have room to add gold without upsetting their recent historical mix of reserve assets. And a round of central bank purchases could take some pressure off their currencies. That would give their monetary policies a bit more of the desired economic bite.

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