Central Bank’s Gold
In March 1999, gold is almost as low as $250 an ounce. In December 2009 it cost more than $1200 an ounce. In ten years, the price of gold has exploded and despite the recovery of the financial markets you will have seen that the price of gold has not dropped. Why? Because one central bank has announced that it secretly accumulated gold reserves, multiplying its gold reserves by three – that Bank is the Chinese Central Bank.
Peoples Bank of China HQ
The Chinese Central Bank announced that it now holds the fifth largest stock of gold of any central bank. Central banks hold gold, they always have. Since they were first created, gold has been used for stabilisation in times when only the gold standard determined trade values and currency values.
Since most currencies became free to convert, gold has lost its importance and in early 1999 most central banks decided to sell gold because gold wasn’t making them any profits. The Bank of England started to sell its gold stock leading to a drop in the price of gold. France, Spain and Portugal followed suit. Almost all countries decided to sell gold except the United States, Italy and Germany.
On one side there are all these vendors, the Bank of England being one the Swiss National Bank another On the other side there is one central bank that is accumulating gold reserves, China. All central banks have gold to protect themselves against possible crises and against possible chaos we have talked about. We talk less about a kind of end of the world where currencies are worth nothing and there remains only one way of trading, with gold. We are reminded that gold earns you nothing and yet the price of gold continues to rise.
Today, there are three different camps emerging within central banks holding gold:
- Those that want to get rid of their gold stocks in the belief that it is not strategic. The Bank of France is one of these central banks.
- Those who want to retain their gold stocks, but who do not want to engage in battle by buying or selling gold, for example Germany and Italy.
- And then there are two countries that are going head to head in confrontation with each other. On the one side there is the United States which has 8000 tons of gold in its reserves but which has decided not to touch it and could increase its stocks if China appeared to want to challenge them on this front. On the other side, the Chinese Central Bank has passed the milestone of 1000 tons of gold to 1054 and has openly announced that it will continue to buy gold.
Central banks’ gold will probably become a new episode in the gold war which will last for centuries. The Central Banks’ gold is a theme that must be closely followed.
Marc Fiorentino – CFO of Euroland Finance