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In 2009 the signatories of the Central Bank gold
Agreement effectively stopped selling gold. 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 U.K. and was
called the Washington Agreement. It received the tacit blessing of the U.S.A.
and Japan. This was followed by the signing of the Central Bank Gold
Agreement, which ran from 27th September 2004 to the 26th
September 2009. Ostensibly to accommodate the I.M.F.’s sale of 403 tonnes of gold on their own books, a third Central Bank
Gold Agreement was signed to run from the 27th September 2009 to
the 26th September 2014. Apart from the up-to 7 tonnes 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 I.M.F. 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. Perhaps a look at the percentage content that gold takes in their
reserves over the years will give us one aspect of the answer?
Table of % of reserves of central banks
in 2000, 2005, 2012
 
This first Table highlights the amount of gold held by the
world’s leading central banks throughout the world then the amounts
held by the nations. More importantly it gives the gold price in 2000, 2005
and 2012. In the year 2000 when the gold price was $275.75 the next table
shows the percentage gold formed of total reserves. As you can see the amount
of gold held officially has dropped since then by 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 as you can see
in the table above.
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
U.K. and Switzerland have watched what’s left of their gold reserves
multiply by six times as defined by the U.S. 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.
Gold as a
Counter to Currencies
 When asked why Germany did not take up its option to
sell 600 tonnes of gold, under second Central Bank
Gold Agreement, Axel Weber, the, 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 €.”
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 U.S. 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 U.S. dominance over O.P.E.C. 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 U.S. 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 as the above
tables amply demonstrate.
Controls versus
Realities
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 E.C.B. 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 E.C.B. 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.
One of the traps financial analysts and investors can
fall into is to believe that arithmetical formulae dominate the relationships
of the movements of markets, including the prices of precious metals. What
makes any relationship between, say oil and gold, or silver and gold, or even
the multiples shares and stocks trade at, is what investors see the future
holds. Items like confidence and trust and investor perception set a pattern
that in turn gives rise to these formulae. Formulae follow and don’t
lead markets. Consequently they are changing all the time. Take the multiples
on the share in U.S. equity markets; they are still very high, telling us
that investors have a high degree of trust in a U.S. growing in the future.
If that belief in the future turns to a bleak one, then these multiples will
fall and reflect that future. So what does the future hold?
Future Central Bank Actions in Gold
With emerging market central banks across the entire
emerging world buying gold as it becomes available on top of other buyers in
the market, the supply of gold at 4,000 tonnes or
so (around 1,600 in scrap and the balance in newly-mined gold) is barely
sufficient to give central banks what they want. It’s likely that from
January 1st 2013, we may see commercial bank demand enter the
market gold market. Due to the implementation of Basel III happening from
then through the next two years, the demand may come first from banks outside
the U.S. before it comes directly from U.S. banks. They’re all aware of
this timetable and certainly won’t want to be in the rush on the date
it is active. So expect to see commercial banks enter the gold market in the
near future. We imagine that they will buy in the same way as central banks
do –waiting for the offer. But with such a heavy potential demand the supply
will prove insufficient. The only way forward in such a market is to chase
other demand away with higher prices, which we certainly expect.
But as we have seen since 2007, the main concern of
governments is the health of the banking sector. This is placed much higher
up the priority list than the citizen’s interests. With the monetary
system decaying steadily, there comes a point where action is needed to
restore confidence in it both home and abroad. As we can see from the above,
it’s the central and commercial banker’s confidence that’s
to be protected first so they can continue to operate like the main arteries
and veins in the body.
To restore that confidence, expect to see gold become the
domain of the central and commercial banks at some point in the future. When
this happens, depends on pre-empting a collapse of confidence and is as such,
is impossible to predict.
With banker’s concerns foremost, the return of gold
to a pivotal position in a world, that will move away from
globalization soon, is certain. It’s somewhere around that point
that one after another, nations will call in their citizen’s gold
whether held at home or abroad through a Confiscation Order. While it will
have a similar impact to the one in 1933, it will be for entirely different
reasons. The only common denominator will be the clear confidence in gold at
the time among bankers.
Julian D. W. Phillips
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