The relationship between central banks and gold is turning on a dime.
From 1950–80, U.S. gold reserves fell from 20,000 tons to 8,133 tons, a 60% decline. In the late 1990s, the U.K. sold more than half their gold reserves (at the lowest prices in over 20 years and the lowest prices since). In the early 2000s, Switzerland sold over 1,000 tons of gold reserves, which prompted a popular revolt against the sales and a referendum to prevent further reductions (the referendum failed, but the point was made and Switzerland has in fact ceased gold sales). Finally, the IMF sold 400 tons of gold in 2010; that was the last such sale by them.
Over the course of this orchestrated gold dumping, central banks continually disparaged the role of gold as a monetary asset. In 2012, former Fed Chair Ben Bernanke told a class at George Washington University that gold standards had failed in the past and were not feasible today (untrue). Bernanke also described the U.S. gold reserve as a mere “tradition” with no role in the current monetary system.
In 1999, a gold sellers’ cartel was organized under the name of the Central Bank Gold Agreement (CBGA). The CBGA was intended to limit gold sales to 2,500 tons per year to prevent crashing the price too much. The CBGA was renewed at five-year intervals in 2004, 2009 and 2014.
Suddenly, the CBGA was not renewed in 2019 and is now a dead letter. The reason? Beginning in 2010, central banks turned from being net sellers to net buyers of gold. Russia and China have more than tripled their gold reserves since 2009. Other buyers include Mexico, Vietnam, Iran and Turkey.
Now the enthusiasm of central banks for gold has spread to developed economies as well. As reported in this article, the central bank of the Netherlands (DNB) has recently said that a “bar of gold always retains its value, crisis or no crisis. This creates a sense of security.” The Netherlands is also building a new military facility to protect their gold (the U.S. gold supply is stored in West Point and Fort Knox, both U.S. Army facilities).
We are now in a new age when gold is regaining the respect of central banks and slowly reclaiming its role as a monetary asset. This is significant in more ways than one. Above all, it implies much higher gold prices in the near future.
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