What We Can Learn from the Central Bank Gold Agreement

Advanced economy central banks stopped selling gold. Why...?

IN 2009 the signatories of the Central Bank Gold Agreement effectively stopped selling gold, writes Julian Phillips at GoldForecaster. 

This was just after signing the third Central Bank Gold Agreement which lasts until September 26th 2014. Why?

In 1999, the first of such agreements was signed by the UK and was called the Washington Agreement. It received the tacit blessing of the USA and Japan. This was followed by the signing of the Central Bank Gold Agreement, which ran from 27 September 2004 to 26 September 2009. Ostensibly to accommodate the International Monetary Fund's sale of 403 tonnes of gold on their own books, a third Central Bank Gold Agreement was signed to run from t27 September 2009 to 26 September 2014. 

Apart from the up-to seven tonnes a year of gold sales by Germany's central bank for the minting of gold coins, there have been virtually no sales of gold from the original signatories of their gold. In fact the previously announced sales (going back to the turn of the century) have not been fulfilled completely, even now. Once the IMF completed their sales of gold, the absence of the developed world's central banks from the sale side of gold spoke volumes! How?

Their absence from the gold market is not a non-event. It makes as strong a statement on policy decisions as either buying or selling gold. If I, as an investor, sold or bought gold, it would express my opinion on the future of the gold price. The same applies to my continuing to hold gold. The same is true of central banks. 

We look at the reasons why the fear of an overhang of central bank gold sales pushed the gold price down until 1999 and why the fear of developed world central bank gold sales has dissipated and added to by the emerging world's central banks buying gold. Generally now, few expect the developed world to sell any more gold from their reserves. 

Since 2000 the amount of gold held officially has dropped since around 2,000 tonnes, but the percentage it forms of total gold reserves has soared to 75.9% in the case of the United States.

The very fact that the world's leading central banks have retained their gold (even though the leading ones sold some of their gold) confirms their statement embodied in the Central Bank Gold Agreement statements that gold remains an important reserve asset.

The leading central banks who sold up to 50% of their gold reserves are being reminded of it frequently. Those who sold 20% under these agreements regret it, but those who signed the agreement but never reduced their reserves by sales into the open market, such as Germany, are smiling on both sides of their faces. But even the more reckless sellers of gold such as the UK and Switzerland have watched what's left of their gold reserves multiply by six times as defined by the US Dollar.

We certainly believe that the well qualified gentlemen who populate central banks know full well that the value of gold goes far beyond its Dollar price. 

We are fully aware that despite not buying more the simple fact that the threat of selling gold, which was the overall case with central banks before this century began, has been replaced by the visible fact that developed world central banks are no longer willing to sell gold but want to keep a firm grip on it, while emerging world banks are buying as much as they can as it becomes available. 

The conclusion of this position is that central banks have moved away from rejecting gold as part of the monetary system and now see it as a reserve asset that is needed in the present monetary system. If the monetary system continues on its current decaying path, then that need will grow. It is a short step from there to wanting more.

When asked why Germany did not take up its option to sell 600 tonnes of gold, under second Central Bank Gold Agreement, Axel Weber, then President of the Bundesbank, said that "Gold is a useful counter to the swings of the Dollar." No other statement explained so precisely why gold must be held by central banks. He went on to say. "Gold is an important factor for the confidence in the stability of the Euro." 

The future is full of change just as the past has been, so a pure currency experiment, even if it lasts for forty years without disaster, cannot be expected to replace gold long-term. The inaction of the signatories of the Central Bank Gold Agreement were fully aware of this when they persisted in including in the Agreements as Clause 1, the statement that: "Gold will remain an important element of global monetary reserves." 

Europe has seen far too much devastating change in the last century to place absolute faith in a currency system that history has shown, all too often, fails under pressure. The US has not had the same experience and has absolute faith in its power and the dominance of Dollar hegemony. History shows that this is vulnerable and is headed for a fall. One only has to look at the threats to the US dominance over OPEC and the oil price alongside the impending arrival of the Chinese Yuan on the global scene to see the dangers from outside. Inside, the state of US debt and the battle over reducing the deficit shows that the Dollar's days both as a measure of value and the sole global reserve currency are numbered.

The behavior of the developed world's central bankers, in retaining the gold they now have, amply demonstrates the realization that gold is the only asset in history that facilitates the passing though from one monetary system to the next. It does this through economic failure, wars and the like. What it boils down to is that trust, in nations and their systems, always fades away. Gold is inhuman and as a result is trusted to survive any such passing.

There's no need for the signatories to buy gold at the moment as the rising gold price is having the same impact as more purchases would have done if the price had remained static.

Leaders throughout history have been impelled to impose controls on their people, "for their benefit". But at the same time they have to accept the harsh realities of their nation's existence. When the Euro and the European Central Bank came into existence, the ECB stated that it wanted to hold 15% of its reserves in gold. If they had held to that it would have required them to sell a great deal of the gold donated to them by member countries because the rising price of gold has defeated that objective as gold is now 33.8% of its reserves. 

For central banks to manage the financial security of their nations prudently, they have to take into account changing risks and realities. We believe that the signatories of the three agreements of the European Central Banks accept that the ECB will not sell gold and change the present percentage. The rising gold price is most certainly acting as a "counter" to the decaying nature of the developed world's monetary system. That's why the signatories have such a tight grip on it.

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