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Category: Economics

Central bankers’ renewed love

You may have missed the news that Poland repatriated 100 tonnes of gold recently – 8,000 good delivery bars, each weighing 12.5 kilos; it bought the...

11 December 2019


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You may have missed the news that Poland repatriated 100 tonnes of gold recently – 8,000 good delivery bars, each weighing 12.5 kilos; it bought the gold in the first half of 2019 and shifted the last batch in the autumn to Poland’s central bank, Narodowy Bank Polski (NBP). The NBP now has 228.6 tonnes of gold. There’s likely to be more to come.

Poland’s gold buying follows that of China, Hungary, Russia, and other national central banks in the last couple of years. Even Serbia bought nine tonnes in October; it intends increasing its total gold reserves to 30 tonnes by the end of 2019, and to 50 tonnes in years to come.

The chart above – produced by the economist and gold analyst Matthew Turner – shows the amount of central bank gold buying in the past three years. There’s been a net addition of 550 tonnes to central bank gold reserves so far this year alone, outstripping purchases in 2017 and 2018. The purchases by national central banks are obviously one factor that has helped push the US dollar-denominated gold price up by more than 17% so far this year.

Central bankers have fallen in love with gold again. The two-decade long divorce has turned out to be merely a trial separation. But why did central bankers, those ultra-cautious individuals fall out with gold in the first place?

More than 20 years ago the world seemed a more rational, friendly environment. History was ‘dead’, we learned. The Cold War was over; China was still a secondary power; the USA had a popular if morally flawed President (some things don’t change); and the European Union appeared to be united. Duped into a more relaxed frame of mind, central bankers appeared to have forgotten economic history. ‘Surely gold is a relic?’ they rhetorically asked themselves.

They then pursued a hasty programme of ad hoc selling of gold. On 24 October 1997, the Swiss Finance Ministry and the Swiss National Bank published a joint report which, inter alia, recommended that Switzerland sell 1,400 tonnes from its 2,590 tonnes of gold reserves. The news from Switzerland rocked the gold market – for decades Switzerland had almost been synonymous with holding lots of gold as a reserve asset. Argentina, Australia, Belgium, Canada, and the Netherlands sold almost 2,000 tonnes in the decade of the 1990s. It seemed that the final blow to gold’s status as the central bankers’ reserve asset par excellence came in May 1999, when the UK’s Treasury announced it intended selling 401 tonnes (at an average price of $275/ounce) out of the Bank of England’s total 715 tonne reserve. Yet thanks in part to the relentless buying of gold by central banks in recent years, the gold price has sharply risen, by more than 400% since the dog days of 1999. This policy reversal has largely gone unacknowledged by the bankers themselves, almost as if they are embarrassed at their former hasty selling.

For example, the Dutch National Bank (DNB) sold 1,100 tonnes of its gold reserves between 1992 and 2008, yet on the DNB’s website today there’s no reference to those sales. Instead there’s a ringing endorsement of gold’s status as a reserve asset: “…central banks, including DNB, have traditionally held considerable amounts of gold. Gold is the perfect piggy bank – it’s the anchor of trust for the financial system. If the system collapses, the gold stock can serve as a basis to build it up again. Gold bolsters confidence in the stability of the central bank’s balance sheet and creates a sense of security.”

The DNB currently has 600 tonnes of gold, worth (very approximately) $21.6 billion. I wonder if Klaas Knot, President of the DNB since 2011, ever looks back with regret? After all, if the DNB had held onto those 1,100 tonnes that would be an extra $40 billion or so in the kitty.

It should go without saying that the past is no guide to the future, and the gold price is as vulnerable to sentiment as any other asset. “Nobody really understands gold prices and I don’t pretend to understand them either,” said Ben Bernanke in 2013, when he was Chairman of the US Federal Reserve. He might have added: “And no-one really understands the thinking of central bankers.” Mind you, when all the world’s central banks looked as though they were gold sellers, the USA wisely held onto its 8,133.5 tonnes of gold reserves.



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