Central banks, and official international institutions, have been major holders of gold for more than 100 years and are expected to retain large stocks in future. They currently account for about 20% of above-ground stocks. The process of rebalancing reserve portfolios to adjust to changing conditions has led to a reduction in the amount of gold held by some central banks recently and this process may continue for some years to come. But the central banks have affirmed that gold will remain an important reserve asset for the foreseeable future and it retains an important role in reserve management. See also Why central banks hold gold for more detail.

Central banks started building up their stocks of gold from the 1880s, during the period of the classical gold standard. Under that system, for countries on the gold standard, the amount of money in circulation was linked to the country's gold stock, and paper money was convertible into gold at a fixed price. The development of banking and credit meant that the amount of money in circulation was greater than the gold stock itself, but everybody had sufficient confidence in convertibility that there was no danger of this option actually being exercised. That at least was the case during the height of the gold standard for the UK, the then dominant economic, political and financial power. As other countries decided to join the gold standard, they also started to accumulate gold so as to be able to maintain convertibility at a fixed price.

The Bank of England, as the central bank at the centre of the system, commanded such universal confidence that it actually needed very little gold. In 1870, its reserves were 161 tonnes and by 1913 this had risen to a still moderate figure of 248 tonnes. Some other countries had by then accumulated much larger stocks: the United States had 2,293 tonnes, Russia 1,233 tonnes, France 1,030 tonnes, Argentina 440 tonnes, Germany 439 tonnes, Austria 378 tonnes and Italy 356 tonnes. Even Australia had more than the UK, at 310 tonnes. The world's total of official gold reserves is estimated to have been about 8,100 tonnes in 1913, compared with only 700 tonnes in 1870.

The rise in official gold stocks

The period of economic nationalism between the two world wars saw a rapid concentration of gold in official hands - up to that point, most gold had always been held privately, circulating as currency among citizens and across borders in commercial trade transactions. Gold, which had been the foundation of the first genuinely international monetary system during the period before World War 1, came to be used as a weapon in economic competition and national rivalries.

In 1933-34, the United States under President Roosevelt devalued the dollar in terms of gold, raising the price from $20.67 an ounce to $35 an ounce. This new higher price caused holders of gold around the world to sell their holdings to the United States. US official holdings rose from 6,000 tonnes in 1925 to 18,000 tonnes at the end of World War II, when it had about 60%of all the official stocks of gold.

At their peak in the 1960s, official gold stocks reached about 38,000 tonnes and probably accounted for about 50% - or perhaps slightly more - of all above ground stocks. Central banks kept gold because, through the fixed official dollar price of gold, and dollar convertibility, it was still the foundation of the international monetary system. Although there was no direct link between gold holdings and national money supplies (as there had been under the classic gold standard), gold was still the primary "reserve asset". Central banks could convert dollar balances into gold at the official price. So gold provided the "anchor" to which all currencies of member countries were linked, directly or indirectly. But gradually, as central banks created more money than was consistent with stable prices, and after several years of moderate but persistent inflation, the fixed official gold price again became unrealistic, and the United States, as the pivot of the system, was faced with the choice of deflating, devaluing or abandoning the system. In August 1971, it abandoned the system, with President Nixon "closing the gold window".

The shift from the United States to Europe

The previous twenty years had already seen a big shift in the ownership of official gold holdings. The post-war recovery of Europe and undervalued exchange rates generated large payments surpluses for Germany, France and other European countries and widening deficits for the United States - deficits that were financed partly by transferring gold. Thus US holdings fell from about 20,000 tonnes in 1950 to 9,000 tonnes in 1971. When in that year President Nixon suspended the convertibility of dollar balances into gold, the world entered the present floating exchange rate regime, where gold's role is confined to that of being one reserve asset, rather than the centre of the system. This cleared the way for the dollar to establish itself at the centre of the system and a large part of the world moved in effect onto a dollar standard. Indeed, under US pressure in 1978 the articles of the IMF were altered so as to forbid countries to peg their currencies to gold (a kind of anti-gold standard).

In the 1980s and 1990s central banks began re-appraising the role of gold in their external reserves. The movement to central bank independence and the more commercial attitude of their reserve managers led some of them to put more emphasis on the current yield on their reserve portfolios. In this environment, gold, as an asset that earns no interest - apart from a small return available from lending gold for those central banks willing to engage in the lending market - began to look vulnerable. Some central banks decided to reduce their gold holdings, and the total of official stocks declined by about 10% between 1980 and 1999. In September 1999, a group of European central banks agreed, in the first Central Bank Gold Agreement CBGA 1, to limit disposals to 400 tonnes a year for five years, and also set a ceiling on the volume of gold lent to the market. They also reaffirmed their confidence in the future of gold as a reserve asset. The agreement reassured the market about the intentions of central banks, since the signatories included those that had been seen as the most likely major sellers, and the price, which had reached a low of $252 an ounce in July 1999, stabilised. CBGA 1 proved very successful and was renewed CBGA 2 for a further five year term in 2004.

See the Central bank agreements on gold section for further details of these agreements.

See also the Why central banks hold gold section for an explanation of the motivations behind official sector gold reserves.

Mobilising gold

As the ultimate form of payment, gold has sometimes proved the only asset, when used either as cash or as collateral, acceptable to counterparties. Gold can indeed play a crucial and strategic role in central bank reserve mobilisation in case of need.

Some examples of where gold has been used in political or economic emergencies are as follows:

• For example, in the 1981 Iranian hostage crisis, Iran refused to accept U.S. dollars in return for releasing the American hostages it held. So the U.S. transferred 50 tonnes of gold instead. As then Treasury Assistant Secretary Manuel Johnson went on to say in Congressional testimony in 1983 - and in the light of this recent experience - "The Treasury, of course, regards the US gold stock as part of our national patrimony and of value as a precautionary asset." The US government simultaneously took ownership of an equivalent quantity of Iranian gold that had been frozen at the New York Fed, so there was no net cost to US reserves.
  



• In 1974 Italy secured a $2 billion loan from the Bundesbank with gold as part of a package (including the then largest ever IMF loan) to shore up its balance of payments after the 1973 oil price rise.



• Hit by a short-run foreign exchange crisis in 1991, India had to rely on its bullion holdings to survive. First the government swapped 20 tonnes on the Swiss market and, later, shipped a further 46 tonnes to London as collateral for a loan from the Bank of Japan. An IMF official at the time noted: "There were discussions over the weekend about a pool of central banks coming to the rescue and the first question that was asked by those sponsor banks was whether they were prepared to give their gold as collateral."
  
  
  
• In 1974 Romania was reported as using gold collateral for a loan allowing it to make external debt repayments and there were reports of similar activities in 1999.
  
  
  
• Finally, gold in the private sector can provide a vital support for public sector purposes. In the aftermath of the 1997 Asian currency crisis several countries in the region announced plans to mobilise residents' gold holdings - Malaysia, South Korea and Thailand among them. Only South Korea raised significant amounts (approximately 270 tonnes) but the avowed intent of all three was to rely on local citizens' patriotism to surrender gold in return for government bonds or local currency. The gold collected was either placed directly in reserves, thereby adding to credibility, or sold for dollars which could be used to repay external debt or in intervention to support their ailing currencies.

Tracking central bank gold holdings

Most central banks place data on their reserve assets, including gold, in the public domain and report them regularly to the IMF, including reports made under the Standard Data Dissemination Standards. Official holdings are therefore generally more transparent and easier to track than those of other large holders such as most major private investors. However, some central banks also hold stocks of gold that are not considered or reported as formal reserves while some official or quasi-official institutions have gold holdings that are not reported. In addition holdings may not always be reported in a way that facilitates analysis. The World Gold Council compiles a number of statistical tables based on official data in the public domain and drawn from a variety of sources.

The future of official holdings

In recent years, all newly-mined gold has gone into jewellery fabrication, industrial uses and private investment and none of it has been absorbed by the official sector; indeed, as we have seen the official sector has on balance been supplying gold rather than absorbing new supplies from the mining sector. In future, it is probable that official gold holdings will continue to decline, at least for a few more years, in physical (absolute) terms, and more steeply as a proportion of central banks' reserves assets and of total stocks of gold.

However, central banks expect gold to remain an important element in their reserves, for reasons outlined in Why central banks hold gold. The majority are believed to be content with the present level of their gold holdings. Further, in recent years a number of central banks that own small quantities of gold are thought to be considering adding to their holdings although the extent of actual buying is so far collectively considerably less than the extent of selling.