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Before
2000, the gold markets of the world were in retreat because of the fear 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 1970’s (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 U.S. 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
200 (an agreement that was
to last for five years) it
was stated that no more than 400 tonnes of
gold 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 I.M.F. has completed
the sales of its 403.3 tonnes of gold in that time. Please note that the motive behind the sale of I.M.F. 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.
Will central banks sell their
gold in the future?
Why agreements were
made?
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 E.U., which allowed it to boom at the expense of weaker E.U. 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 E.U., 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 E.U. roped in its members, including Britain and with the tacit support of Japan and the U.S.A. (who has 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.
A Change in the Tide
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 I.M.F. 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.
Julian
D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
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