On July 26, 2019, the European Central Bank (ECB)* announced that the Central Bank Gold Agreement, signed 20 years ago, will not be renewed. What does it mean? What important processes in the global economy does it indicate?
History and purpose of the agreement
The Central Bank Gold Agreement was signed in 1999 by the ECB and 14 central banks of European countries. The heads of state were fully aware of the key role of gold in ensuring Financial Security, so the purpose of the agreement was to balance the gold market and make it more transparent.
In order to avoid market turmoil, the central banks agreed not to sell large quantities of gold that exceeded a certain limit. The agreement was extended three times, and each time its conditions were eased. To date, the document has been signed by 21 central banks in Europe.
In the photo: the headquarter of the European Central Bank in Frankfurt am Main (Germany).
Within the period of 20-year-old agreement history, the global gold market has become more developed and safer. During this time, the price of the precious metal increased five times.
On August 20, 2019, the price of gold was $1,497 per ounce. On this day, back in 1999, the price of gold was $257.
Building up gold reserves
The parties to the agreement never violated its terms and did not exceed the established sales volumes of gold. On the contrary, in recent years, the European central banks have demonstrated a steady tendency for the accumulation of the yellow metal. To a large extent, this was due to the economic crisis of 2008, which proved the advantage of gold over national currencies.
According to the World Gold Council*, in 2018, central banks acquired a record amount of gold in the entire history of the modern international monetary system.
In the chart: last year, the demand for gold from the central banks amounted to 651 tons. This is the highest figure since 1971, when the US President Richard Nixon abandoned the gold standard* system.
In circumstances when countries prefer to stock up gold, sales restrictions that the central banks impose become irrelevant. Therefore, it was decided not to renew the agreement, which expires on September 26, 2019. The ECB statement says that all the affiliated parties recognize the importance of gold and have no intention to sell large quantities of gold.
Reasons for stocking up gold reserves
The strategy of the European central banks can be easily explained: the economic slowdown and the uncertainty with Brexit* bred fears, forcing us to stock up on a reliable risk-free asset. Gold suits this purpose, given that it is not controlled by any state and never depreciates.
The crises of recent decades have shown the effectiveness of gold in resolving financial problems. The alarming state of the global economy prompt countries to accumulate gold more actively, the price of which is increasing amid the deteriorating international situation.
*The European Central Bank (ECB) — a financial institution of the European Union that regulates monetary policy within the Eurozone.
*The World Gold Council — the market development organization, founded by the world's leading gold producers to stimulate demand for gold.
*The gold standard — a monetary system in which each economic unit of account (national currency) is based on a fixed quantity of gold. For example, the US twenty-dollar bill ($20) was equivalent to one ounce of gold in 1928.
*Brexit — the withdrawal of the United Kingdom from the European Union.