A gold reserve is the gold held by a central bank or nation intended as a store of value and as a guarantee to redeem promises to pay depositors, note holders (e.g., paper money), or trading peers, or to secure a currency. Today, gold reserves are almost exclusively, albeit rarely, used in the settlement of international transactions

The Chinese, Indian and Russian and other central banks are buying gold. The Indian Government recently bought 200 tonnes from the IMF to support international commitments. This new trend for buying gold by the Asian, Brazilian and Middle Eastern central banks (who still have very little gold compared to their reserves in dollars) is a supporting factor for gold prices.  As for Occidental central banks, they are less and less inclined to get rid of a metal which could become part of a new world reserve currency as desired by Russia and China.

The table below shows the proportion of gold in the foreign exchange reserves of central banks and not the gold reserves ratio of the currency.  As the FED has very little foreign currency in its reserves, its gold stock seems considerable, but this stock of gold is only 1.6% of  the quantity of dollars in the money supply.

National Reserves December 2009

Potential candidates for large gold purchases over the next few years are in the order they appear on the list: Japan, China, Russia, India  and Taiwan.

Astonishingly, in March, a European bank signed agreements with Washington II (with a sales quota of 500t per year) to buy gold! This is astonishing because since the beginning of the 1980’s, central European banks have not stopped liquidating their gold stocks which has had a heavy impact on the price of gold which dropped from $850 in 1980 to $256 in 2001.  Between 1999 and 2002 Gordon Brown then, Chancellor of the Exchequer, sold off 395 tonnes, 60% of the UK’s gold reserves, at rock bottom prices averaging $280 per ounce, about a quarter of its current value.

As for the USA, their gold reserves have remained virtually unchanged since 1980 and today are 8133 tonnes.  But doubts remain about the proportion of physical gold that would be available to control gold prices, as the gold may not longer physically exist in the reserves but is in paper form.

A year ago, the International Monetary Fund (IMF) announced that it would sell  off 403t from the 3217t that it had held for several years  in its reserves.  During the G20, the gold market was nervous due to speculation about possible additional sales by the IMF.  The IMF had simply stated that it would allocate the sale of these 403t of gold to help poor countries.  Subsequently the IMF sold 200 tonnes to India , 10 tonnes to Sri lank and 2 tonnes to Mauritius. That this announcement is part of a deliberate plan to curb the price of gold in these difficult times is clearly questionable.  But it will be impossible to counter market forces in the long term.  When the price of gold rose from $200 to $850 at the end of the 1970’s, the IMF sold 1600t of gold on the market without being able to stop the rise.  To these sales were added the sales of the USA who liquidated some of their gold stocks.

Today the central banks’ gold stocks are a lot lower and the state of the economy is in a lot more trouble than during the stagflation of the 1970’s.  The price of gold no longer has formidable adversaries who can curb its rise.  Instead it now has formidable allies in countries such as China and Russia!

Adapted from an article  by Léonard Sartoni first published in Q1 2009

Tags: deflation, DOLLAR, Gold, Money, stock

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