European Central Bank Gold Agreement

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In total, central banks bought 651 tonnes of gold in 2018 for nearly $30 billion. This corresponds to the unrivalled confidence that gold enjoys as a stable asset. It is therefore clear that the gold market has really developed in terms of maturity, liquidity and investor base. At Novem Gold, we eliminate the inconveniences of physical gold selling, uncertainty of personal storage and verification problems when buying at the same time. It represents the best of technology and know-how that fundamentally disrupts an industry. The CBGA has joined 15 banks in the euro area and limits the amount each signatory could sell each year on the market. This limit was decisive in creating a sense of stability in the gold markets. At the time of signing, the price of gold was about $200. In a remarkable presentation of the maturity of the gold market and the level of liquidity, prices did little to fle after this announcement. Gold therefore has an established status as a safe port investment. 20 years ago, central banks were net sellers of gold and liquidated about 500 tonnes a year.

European central banks have welcomed their intentions, but there is a good chance that the central banks concerned will supplement their gold holdings. This could be the beginning of an open season, for lack of better words, in the gold market. The central bank`s first gold agreement, also known as the Washington Eraweich Gold Agreement, was announced on 26 September 1999. An increasingly worrying period ensued to see uncoordinated gold sales by central banks destabilize the market and push the price of gold down. In the context of 2018, which is one of the highest purchases of gold, it is very likely that central banks will be net buyers of gold. Central banks are now net customers. The Bundesbank itself does not sell more small quantities of gold to the Ministry of Finance each year. The ministry uses precious metal to mark commemorative coins. To address these concerns, 15 European central banks – those of the 11 eurozone countries and Sweden, Switzerland and the United Kingdom and the European Central Bank at the time – developed the first central bank gold agreement, “CBGA1”. The agreement was signed in 1999 on the anniversary of the International Monetary Fund in Washington DC. To learn more about Novem, visit: novemgold.com With this agreement, the signatories have committed not to market more than a maximum amount of gold on the market during the term of the contract.

The aim was to stabilize the gold market by creating transparency of central bank intentions. The agreement was initially between 15 central banks, but the number of signatories has increased to 22. Since 1999, the agreement has been renewed three times, for a period of five years, and conditions have eased over time. Fiat`s periods of monetary instability are obviously excellent for gold prices. About two years after the Great Financial Crisis (GFC) of 2008/2009, gold prices increased in 2011 to $2,000. During this period, the behaviour of central banks has changed. In times of uncertainty, central banks continue to increase their gold stocks. Although gold prices are solid, it is unlikely that the central banks involved will abruptly liquidate their holdings. The agreements have been beneficial for all aspects of the gold market for producers, producers, investors and consumers, particularly in heavily indebted poor countries (HIPCs), some of which are major gold exporters. Central banks have also benefited from the agreements as a result of improved stability in the gold market and the market value of reserves.

Two decades later, demand for gold has soared, pushing up prices. At the time of writing, gold was traded at about $1,500 per ounce. It is fair to say that CBGA has had a significant impact on prices. The fourth and final CBGA expired on September 26, 2019.

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