The Washington Agreement (WA) on gold came into the world with an almighty bang on 26 September 1999. On 26 September 2019 the agreement will finally end, with barely a whimper. This week the European Central Bank confirmed that it will allow the WA to lapse because, in its words, the gold market has settled down “in terms of maturity, liquidity, and investor base.” In other words – no central bank is interested in selling gold anymore. And that news isn’t a whimper but a very loud bang as far as gold investors are concerned.
In the last two decades the world has altered in unimaginable ways. The internet – little more than a promising experiment in 1999 – has revolutionised everything, including finance; it has, for example, made Glint possible. These two decades have seen President Putin put Russia’s territorial expansion back on the agenda; China is flexing its muscles and the West is alarmed about Beijing’s global ambitions; the prospects of a cross Iran getting a nuclear weapon are very real; the UK is deeply split over trying to leave the European Union, and the EU is struggling with economic stagnation; and the USA has a maverick, erratic President. Whatever happened to Francis Fukuyama’s book The End of History (published 1992)? Answer: it’s been postponed.
All of which helps to explain the rise of the gold price from a 20-year low of $257.80/ounce in July 1999 to more than $1,429/ounce today. The era when some central banks tried to chuck gold into history’s dustbin is over. The world now is a darker place, with uncertainties everywhere.
Why was the WA signed in 1999?
The global gold market was a shambles back in the 1990s. Belgium and the Netherlands were selling gold from their official reserves. Then in October 1997 the Swiss Finance ministry recommended that the Swiss National Bank sell 1,400 tonnes of its 2,590 tonnes of gold reserves. In April 1999 the Swiss held a referendum to cancel the Swiss Franc’s gold-backing, and so enabled the sale of 1,200 tonnes. In 1999 the UK’s Chancellor, Gordon Brown, of the Labour Party, under the influence of a young advisor and former Financial Times journalist called Ed Balls, called for the International Monetary Fund (IMF) to sell gold from its holdings. Brown also decided to sell 395 tonnes of the UK’s 715 tonnes. The UK’s gold sales ended in 2002 and achieved an average price of $275/oz; since then the gold price has averaged almost $1,000/oz. The Financial Times has always been anti gold – even when the gold price soared after the UK sales, and Brown had effectively lost the UK £16 billion, the newspaper was still rubbishing gold as a reserve asset.
Amid 1999’s turmoil, 15 leading European central banks and the European Central Bank signed the WA, which was monitored by the Bank for International Settlements. Notably, the USA, which had and has more than 8,000 tonnes in its reserves (75% of its foreign reserves) didn’t sign the WA. Nor did Germany, a country where the hyperinflation of Weimar days is burned into the national memory. For those two countries at least, gold was and remains a valued defensive and/or protective asset.
A five-year agreement, which was to be renewed every five years (it was four times), the WA committed the central banks to coordinate their sales of gold from their official reserves; annual sales by the signatories would not exceed 400 tonnes (2,000 tonnes over five years); they agreed not to expand their gold leasing and their use of gold futures and options; and acknowledged that gold would remain “an important element of global monetary reserves”. Sales from the signatories of the WA reached 500 tonnes in 2005 but dropped off soon afterwards (see the chart below, from Bloomberg). The central banks evidently signed in haste and repented at leisure; the new generation of younger central bankers had forgotten why they had gold reserves in the first place. As the world turned darker they quickly remembered. In 2018 central banks bought 651.5 tonnes of gold, 74% up on the previous year, according to the World Gold Council.
Clearly, central bank gold buying helps the price to rise. A major question for the individual holder of gold is – will central banks stop buying? Well, they may do, but the signs are that they still have a healthy appetite and they want to diversify from the US dollar – Russia and China are strong examples of this. The next question for anyone is, should I be following the central banks’ lead and getting some gold? That’s a rhetorical question: get a Glint Mastercard, download the Glint app – and do not make the same mistake as Gordon Brown.