Official Sector Sales

Central bank selling has been a constant on the supply side for a very long time and will very possibly continue to be for the predictable future. Most gold markets analysts and traders, on the other hand, see sales as a necessary component of the supply side of gold fundamentals table. On the other hand though, a close examination of the chart shows that central bank gold sales were never a danger to actual tonnage sold that the financial media made them out to be.

For the most part, it was not so much the sales themselves that damaged gold sentiment in the late nineties and early two thousands, but the almost continuous threat of sales and the subsequent sales, and the exaggeration of that threat on the financial pages of the world’s newspapers that acted as a deterrent to the rising gold price. As a matter of fact, the market absorbed whatever gold was sold with barely no difficulty, and even if the sales usually exerted some passing, short-term pressure on the price, the long-term effects of central bank sales were negligible.

Seeing things in a historic point of view, from nineteen sixty-five to nineteen seventy-five, the Anglo-American countries, Australia, Canada and the United States, were the primary sellers of gold, with the United Kingdom and the United States at the international forefront and Europe for the most part, remaining on the sidelines. In nineteen sixty-five, the Anglo-American countries held almost sixteen thousand tones of gold in reserve. By nineteen seventy-five those holdings had been pared to ten thousand tones, with the Untied States suffering the greatest drain. Most of that gold was expended in defense of the dollar and the thirty-five dollar-per-ounce post-World War II benchmark. Europe, on the other hand, held eighteen thousand tones on reserve in nineteen sixty-five and seventeen thousand tones in nineteen seventy-five. So Europe participated very little if nothing at all in the pre-nineteen seventy-five disgorging of gold from official reserves.

From nineteen seventy-five to the mid-nineteen nineties, the Anglo-American and European countries lost an amount of about one thousand tons each from their reserves. A large amount of that went to Asian countries, which accumulated one thousand five hundred tons. Even so, the five hundred tons that trickled into the private sector over this two decade period were far from the avalanche intimated by the financial media and press. In nineteen ninety-two, net official sales of gold reached a high limit at six hundred twenty-two tons, then rapidly fell to a low one hundred thirty tons in nineteen ninety-four. From that point, the official sector sales trended upward until two thousand three, and from there remained between four hundred-fifty to five hundred-ninety tons. Much of the official sector selling in the early and mid-nineteen nineties occurred to meet the requirements of the new European Monetary Union, EMU, as mantained by the Maastricht Treaty. Most of that official sector selling came from the Netherlands and Belgium, two countries with strong debt loads which needed to be reduced before EMU entry. Australia, Canada and a few other handful of smaller central banks sold gold in amounts that had little or no effects on the market price.

In nineteen ninety-nine, when the Bank of England informed that it would sell off a significant portion of its gold reserve, ostensibly to reinvest the proceeds in interest-bearing dollar and euro-based securities, gold fell precipitously from the three hundred-thirty dollar to the two hundred-fifty dollar range. But even though the sales were strongly publicized, the downside was briefly lived and the Bank of England suffered the embarrassment of selling almost sixty percent of its remaining seven hundred-fifteen ton gold reserve at less than three hundred dollars per ounce. At the time of the sale, parliamentarian Sir Henry Tapsell voiced the feelings of many people within the United Kingdom:

The whole point about gold, and the quality that makes it so special and almost mythical in its appeal, is that it is universal, eternal and almost indestructible. The minister will agree that it is also beautiful. The most enduring brand slogan of all time is, ¨As good as gold.¨ The scientists can clone sheep, and may soon be able to clone humans, but they are still a long way from being able to clone gold, although they have been trying to do so for ten thousand years. The chancellor of the Exchequer, Gordon Brown, may think that he has discovered a new Labour version of the alchemist’s stone, but his dollars, yen, and Euros will not always glitter in a storm and they will never be mistaken for gold.

As previously mentioned, such sales were abruptly capped by the signing of the Central Bank Gold Agreement. Even though we still do not know for certain the entire political and financial motivations which are behind the sales, some believed that the Bank of England was selling gold to buy currencies that were paying historically low interest rates, nation-states hardly ever sell gold because they want to or desire it. Most of the time, if not always, they sell gold because economic and financial conditions compel them to do it.