In the grand scheme of the global gold market – and particularly in relation to the combined annual gold purchases of the world’s two largest consumers, China and India – this week’s announcement by the Euro-zone and its affiliated nations Switzerland and Sweden, as reported in the Financial Times, had a limited effect but was still enough to briefly lift the gold price back above $1300 per ounce.
European central banks have renewed a five-year agreement by committing not to sell “significant” amounts of gold. Under the current Central Bank Gold Agreement, which expires in September, the Euro-zone countries plus Sweden and Switzerland pledged not to sell more than 400 tons of bullion from their combined holdings each year.
The renewal of the CCBGA, which would have expired in September, pledges the euro-zone to manage gold sales “so as to avoid disruptions to the market.” The signatories noted that, currently, they do not have any plans to sell significant amounts of gold,” the banks added. Indeed the CBGA has not needed to be enforced in recent years as central banks have tended to hoard gold. The market still saw this as a positive commitment to stick with gold as its currency-backing metal in the future.
What is the CBGA?
The agreement, established in 1999, was designed to reduce the volatility in the gold market caused by large sales by central banks. European members of the CBGA own around 11,000 metric tons of gold, more than one-third of total official sector holdings. Of this, European central banks sold just 23.5 tons of gold – mainly for minting gold coins – during the last five years. Over the past four years, central banks globally have been net buyers of gold, with purchases totaling 368.8 tons in 2013. China and India, alone, are consuming more than 2,000 tons per year, mostly in jewelry but also unseen quantities are going into China’s central bank.
The central banks are keen to avoid a repeat of a fall in gold prices and, correspondingly, the measure of Euro-zone countries reserves) that followed what the Telegraph termed “Gordon Brown’s catastrophic decision to sell Britain’s gold reserves” between 1999 and 2002 when the then-British Prime Minister sold 400 tons, half of Britain’s reserves at the time, at the historically low price of $300 per ounce, depriving the country of billions.
Avoiding A Market Bottom
The debacle became known rather unflatteringly as Brown’s Bottom and not only devalued Britain’s reserves, but those of every other central bank that held significant gold reserves as it forced the international gold price down.
While the announcement is, in practice, not seen as likely to change any real behavior by Europe’s central banks, the fact they have renewed it some months ahead of the expiration date illustrates the combined commitment to holding gold in spite of recent falls in price from its record peak of $1,900 an ounce in 2011.