Gold News

How Central Banks Have Influenced the Gold Price

The bull market in gold owes much to the policies of the world's central banks...

BEFORE THE year 2000, the world's gold markets were in retreat, writes Julian Phillips at GoldForecaster.com.

The fear was that central banks would unload the 34,000 tonnes of gold they held in reserves. 

Britain conducted the last, great sale, selling half of their reserves at the lowest price the gold market has seen since the early 1970s (and has not been seen since). 

That fear was softened by the "Washington Agreement" wherein many of the world's leading central banks, (excluding the US and Japan who gave their tacit blessing) agreed that they would sell no more than 400 tonnes of gold per year, for the next five years.   

This limited the central bank 'gold overhang threat' on the Gold Price. The sales held to these ceilings and had limited effect on the gold market, which allowed the Gold Price to rise. 

The second Agreement raised that ceiling to 500 tonnes per annum, but sales did not reach that level for the duration of the agreement. In the final years of the agreement, the amount sold had dropped dramatically until it expired.  

Since the start of the Third European Central Bank Gold Agreement started on September 27th 2009 (an agreement that was to last for five years) it was stated that no more than 400 tonnes of Gold Bullion in total was to be sold by the signatories. 

One year and nine months later and less than 10 tonnes of gold has been sold by them. The bulk of the amount that has been sold was used to make coins and so should be considered as sales outside this agreement. The reality is that the signatories of this agreement are no longer sellers of their gold but very firm holders of it.   

The IMF has completed the sales of its 403.3 tonnes of gold in that time. Please note that the motive behind the sale of IMF gold was not in support of a currency, but to assist only in its ongoing operations. While it agreed to fall under the Third CBGA it was not part of it. Having sold all the gold it owned as a 'corporation', it has no more to sell. The rest of its gold belongs to its members. 

Central banks like Russia, China and Mexico are Buying Gold for their reserves. 

In 1999 the Euro was launched to replace the currencies of the European Union with a common currency. The world's strongest currency, the Deutschemark, disappeared but gained a fixed exchange rate for its goods within the EU, which allowed it to boom at the expense of weaker EU members — members who now had a currency that was artificially strong, in light of their own Balance of Payments.

France lost the Franc, Spain its Peseta and so on. And now this brand new currency, the Euro, needed the support of the members of the EU, which was not so difficult. Along with membership came tremendous incentives and benefits; now in the case of Greece, however, this is regretted. But the launch of the Euro was still not without its risks.   

The temptation to turn to gold to ameliorate the risks was great. In their infinite wisdom, the EU roped in its members, including Britain, and with the tacit support of Japan and the USA (who had done exactly the same when gold was removed as backing for the Dollar in 1971) formulated the "Washington Agreement" through which the members sold a limited amount of gold. This turned fearful Euro supporters into firm ones because the Gold Price remained under threat, albeit a limited one.   

The signatories' sales were really token sales, as the bulk of member's gold remains in their vaults even today. But the Agreement ensured that gold remained on the sidelines of the monetary system, until around 2007, when the credit crunch hit. It became apparent that currencies backed by nations and their officials, was not as good as gold.

Once the credit crunch hit hard, we were reminded that a national currency's performance was linked to its economy, which meant its value depended on its performance and size and was not necessarily related to its underlying value. 

When quantitative easing began, it became clear that its value lay in the hands of central banks. Their primary task was to maintain price stability internally; however, this role soon extended to supporting the banking system, maintaining the nation's creditworthiness, and stimulating the economy.

From 2005 onwards, the Gold Price steadily rose to around $1,200. In the credit crunch it dropped back to $1,000 because the frantic search for liquidity caused a sharp sell-off of all assets including the ones that were performing well.

This left a massive gap in the instruments that would hold their value through the decades.   Only assets that countered the value swings of all currencies could do that job. Once the liquidation of debt ran its course, investors turned back to gold and silver for wealth preservation. This was added to by the new wealth of the emerging world where gold and silver had and will always be thought of as providing value and financial security. Then the Gold Price resumed its rise, followed by silver.   

To emphasize the wisdom of precious metal buyers, the signatories to the Central Bank Gold Agreements slowed their sales of gold to a stop in 2009/10 (this ignores the IMF sales, which were executed for other reasons). 

Emerging nations, along with their public, began to increase the size of their purchases, taking the Gold Price up to $1,500 and silver to $35. Today, central banks are either buyers or holders of gold, reinforcing the idea that 'gold is money', as had been the case before currencies abandoned gold backing.

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JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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