2004 – European central banks renew the CBGA

ECB Press release – Joint statement on gold, March 8th 2004

On March 8th 2004 an announcement was made concerning the second Central Bank Gold Agreement. Like the first agreement this covered a five-year period, in this case from September 27th 2004 (immediately after the expiry of the first Agreement) to September 26th 2009.

The second agreement started by reaffirming the first clause in the 1999 agreement: “Gold will remain an important element of global monetary reserves.” While the rest of the agreement covered similar ground to the first, there are some important differences.

The UK signed the first Agreement but not the second (at the time the second Agreement was announced it stated that the UK government has no plans to sell gold). Greece, which was not a member of the Eurozone in 1999, did not sign the first Agreement but has signed the second. Slovenia became a signatory to the second Agreement in December 2006, shortly before adopting the euro as its currency.

The maximum amount of gold that the signatories can sell over the five years is 2,500 tonnes, compared to 2,000 tonnes in the first Agreement. Whereas in the first Agreement, the wording specified that annual sales would not exceed approximately 400 tonnes, the second Agreement stated that annual sales will not exceed 500 tonnes. In addition the first agreement referred to “already decided sales” but the second refers to “sales already decided and to be decided”. It has become clear subsequently that only some of the sales have been settled. The Agreement can, therefore, perhaps be viewed as an “option” that the signatory banks now have to sell collectively up to 2,500 tonnes of gold over the five year period should they wish.

As regards gold lending, the second agreement stated that the signatories have agreed that “the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the start of the date of the signature of the previous agreement”. It is generally believed that gold leasing has declined during the period of the first agreement so the second agreement does give some limited scope for expansion.

See our Research and statistics website for detailed statistics covering gold sales under CBGA.

 

1999 – The European central banks declare their confidence in gold

Press release – joint statement on gold, 26th September 1999

The Central Bank Gold Agreement (also known as the Washington Agreement on Gold) was announced on September 26, 1999. It followed a period when there was increasing concern that uncoordinated central bank sales of gold were destabilising the gold market and driving the gold price sharply down.

Central banks held nearly a quarter of all the gold thought to be above ground (equivalent to around 33,000 tonnes in September 1999) so their actions were of key interest to the gold market. Much of this interest focused on the central banks of Western Europe. Many of these held - and still hold - substantial stocks of gold in their reserves. Some (Netherlands, Belgium, Austria, Switzerland and the UK) figured among those banks which had recently sold gold or announced plans to do so. At the same time, with increasing demand for borrowed gold, a number of central banks were increasing their use of lending, swaps and other gold derivative instruments. Since, due to the workings of the gold derivatives market, an increase in gold lending normally results in additional gold being sold, this growth in lending was adding to the amount of gold supplied to the market.

In addition to the destabilising effect on the gold market of these sales, the fall in the price of gold due to market fears of central bank intentions was also hurting countries which produced gold. Among these were a number of developing countries including a significant number of those classified as HIPCs (Heavily Indebted Poor Countries).

In response to these concerns fifteen European central banks (those of the then 11 Eurozone countries plus the European Central Bank and those of Sweden, Switzerland and the UK) drew up the Agreement, in which they stated that gold would remain an important element of global monetary reserves. They agreed to limit their collective sales to 2,000 tonnes over the next five years, around 400 tonnes a year. And they announced that their lending and use of derivatives would not be increased over the five-year period. (At a later time it was stated that the total amount of gold out on lease from the signatory banks in September 1999 was 2,119.32 tonnes.)

The signatory banks accounted for around 45% of global gold reserves. In addition a number of other major holders - including the USA, Japan, Australia, the IMF and the BIS, either informally associated themselves with it or announced at other times that they would not sell gold. Including these, the proportion of gold reserves covered by the Agreement or a similar announcement rises to around 85%.

The announcement of the Agreement was a major surprise to the market prompting a sharp spike in the price in the following days, but it removed much of the uncertainty surrounding the intentions of the official sector. Once the markets had adapted to it, a major element of instability was removed.

The Agreement covered the five years from 27th September 1999.

 

July 7, 1998 – the new European Central Bank decides to hold gold

The Governing Council of the European Central Bank, in one of its first pronouncements, decided that gold should be included in the initial transfer of foreign reserve assets to the European Central Bank from the national central banks participating in the euro area, to take place on the first day of 1999 (the date of the launch of the euro as a single currency to replace the existing national currencies of the 11 countries initially joining EMU). It was decided that the initial transfer of foreign reserves would be to the maximum allowed amount of EUR 50 billion, adjusted downwards by deducting the shares in the ECB's capital subscription key of the EU central banks which will not participate in the euro area at the outset i.e. approximately EUR 39.46 billion.

The ECB agreed that 15% of this initial transfer should be in gold with the remaining 85% being transferred in foreign currency assets. It was made clear that this would not affect the total consolidated gold holdings of the ECB. Also there was no implication that the ECB would maintain a constant ratio of 15% of its reserves in gold in future.

This decision indicated that European central bankers continued to believe that gold strengthened the balance sheet of a central bank and enhanced public confidence in the currency it issued. As one of the world’s major central banks had with this decision reaffirmed that it needed to own gold and to show gold on its balance sheet, in that sense this decision symbolised the failure of previous attempts to write gold out of the system.

The IMF also confirmed that it saw its remaining gold holdings as giving a “fundamental strength” to its balance sheet.

 

1978 - The IMF attempts to write gold out of the system

The purpose of the Second Amendment of the IMF Articles was to delete gold from the international monetary system. It followed the failure of attempts to establish a new international monetary system, and in particular the failure of attempts by European countries to force the United States to settle its deficit in gold, or to devalue the dollar against gold. Far from agreeing to keep gold in the system, the United States then led a crusade against gold (while being careful to keep a very large strategic stock of gold in its own reserve, sealed off from the outside world). This amendment barred members from fixing their exchange rates to gold and removed the obligation on members to conduct transactions in gold at the official gold price.

To symbolize the plan to drive gold out of the system, the Fund was instructed to dispose of 50 million of its stock of 153 million ounces, partly by sales to the market and partly by giving some gold to members in relation to their quotas. Ironically, this exercise had the effect of spreading gold much more widely through the international community than ever before, and gave many countries a new interest in the gold market. Few countries showed any inclination to sell the gold handed to them and in the vast majority of cases it continues to sit on their books.

 

Early 1960s – central banks try to stabilize the price of gold

This “gentlemen’s agreement” among central banks known as the Gold Pool was established to hold the price of gold close to the then official price of $35 an ounce and followed a speculative attack on the dollar that brought the price up to $40 an ounce. In the Bank of England’s words, “this state of affairs threatened the whole structure of exchange relationships in the western world”. The Bank, with the support of the US authorities, therefore sold gold on a substantial scale to bring the price down “to more appropriate levels”. Following a further speculative flurry the following year, in October 1961the central banks of western Europe agreed to cooperate with the New York Federal Reserve Bank to stabilise the market. Following a change of market conditions, this was followed by a period of coordinated purchases of gold. However, the Cuba missile crisis of July 1962 triggered record demands for gold on the London market, which was again met by official selling. The objective throughout was to “avoid unnecessary and disturbing fluctuations in the price of gold in the free market”.

The Bank of England’s conclusion on this experiment was that “the knowledge that the central banks were working together in the gold, as well as in the exchange markets, has helped to maintain public confidence in the existing international monetary structure”.

The Gold Pool was abolished in 1968 when the central banks agreed that they would no longer supply gold to the market but transact only among themselves (at the official price). This established a two-tier system – one for private transactions, where the price fluctuated according to supply and demand, and the other for official transactions at the official price. This lasted until November 1973, when the price of gold was allowed to move freely, following the suspension of dollar convertibility into gold in August 1971.

See our paper on The IMF and Gold for a more detailed discussion of the historic and the recent position of the IMF with respect to gold as an official reserve asset.

 

1944 - establishment of the IMF puts gold at the centre of the new international monetary system

The first international agreement on gold came with the signing of the articles of agreement of the IMF in July 1944. These laid down that all member countries should establish “par values” for their currencies in terms of gold, or in terms of the US dollar which was itself defined in terms of gold. One dollar was valued at 0.888671 gram of fine gold, or $35 an ounce. Thus the agreement confirmed the price of gold as established by President Roosevelt in 1933. Gold thus became the foundation of the first international monetary system established by international agreement. It was the “glue” that held the system of exchange rates together.

To give the new IMF usable resources to enable it to start lending, members were also required to pay 25% of their subscription of the Fund in gold. Members had to buy and sell gold at the fixed price (plus or minus a margin set by the IMF0. Gold was also the ultimate reserve asset.

This requirement and the growth of membership resulted in the Fund’s holdings of gold rising to 153 million ounces by 1975, worth at the time $21 billion.

See our Monetary history of gold section for a longer term view.

A range of statistical data on official gold holdings is available from our research and statistics website