The Central Bank Gold Agreement:

A Watershed Event for the Gold Market: In September of nineteen ninety-nine, when the central bankers who represented the European nations signed the Central Bank Gold Agreement, George Milling-Stanley of the World Gold Council spoke for many people in the gold mining industry:

It is important to recognize that the agreement represents something of infinitely greater significance than a mere repetition of statements central bankers have already made, or a clarification of positions they already held. This is a binding agreement, signed by central bank governors on behalf of their respective institutions and or governments... this should finally put to rest the fear that has kept the gold market in its paralyzing grip for years, the fear that central banks have abandoned gold as a reserve asset, and are planning to sell all that they have... That fear flew in the face of all the observable evidence. It is a matter of fact that only five governments have sold a significant quantity of gold in the past ten years, if we define a significant quantity as one hundred tons or more.

 The agreement went much more profoundly than just controlling central bank gold sales, it also curtailed the leasing of gold and central bank participation in the futures and options markets. The announcement sent the price way up from two hundred-fifty dollars per ounce to passing the three hundred dollars per ounce a few days after. Even though gold was controlled and was settled down a short time after, many analysts center the attention to the signing of the Central Bank Gold Agreement and its stern controls on the supply of gold proceeding from the central banks as a watershed event that inaugurated the new, secular gold bull market.

Present Chief Executive Officer for the World Gold Council, Haruko Fukuda, said something with eloquence on the topic at the Denver Gold group conference that year:

On Sunday twenty sixth September – just three weeks ago – a new era dawned for gold. For the first time in almost exactly twenty eight years, since convertibility of gold into U.S. dollars for official holders was suspended on fifteenth August nineteen seventy-one, the governments with the largest gold holdings made a positive joint statement on gold. Those three decades have been a period in which gold has persistently sidelined by the official sector attempting to demagnetize gold. In recent years the market has been plagued by persistent rumors of ever increasing official sector sales and each and every announcement of sales by central banks has acted as a trigger for a new downturn in the price of gold. Yet the amount of gold held in reserve by the official sector has barely declined during that period – a decline of a mere 6 percent in three decades.

The Central Bank Gold Agreement was simple, but direct:

Gold will keep on being an important element of worldwide monetary reserves.

The previously mentioned institutions will not enter the market as sellers, with the exception of the already decided sales.

The gold sales already decided will be achieved through a concerted program of sales over the next five years, sales per year will not exceed approximately four hundred tons and total sales over this period will not exceed two thousand tons.

The signatories to this agreement have agreed not to expand their gold leasing and their use of gold futures and options over this period.

This agreement will be reviewed after five years.

The signatories to this agreement were: The European Central Bank, the United Kingdom, Switzerland, Sweden, Spain, Portugal, the Netherlands, Luxembourg, Italy, Ireland, Germany, France, Finland, Belgium and Austria. Although Japan is not a signatory it publicly endorsed the agreement the day after. The United States, which is also not a signatory, endorsed the agreement too. The United States nor the International Monetary Fund, IMF, lend gold.

In March two thousand four, the signatories renewed the agreement for five more years with one changed provision: the amount of gold was increased to be sold over the five year period from two thousand tons to two thousand five hundred tons, a relatively good change. The new agreement was generally accepted in the gold market as a positive development, with a few commentators asking themselves if the central banks would be able to muster sufficient gold to get to the two thousand five hundred ton objective. The most important part of the agreement, the fact that the leasing and sales activity are, as a matter of fact, capped and of known quantity, stays in place.