Which Central Banks Are Fading Gold?

Earlier this year, I posted on Finance Manila about the relative value of gold against currencies other than the dollar. This is sort-of a follow-up to that, focusing on the actions of world central banks.

I just received via email the latest data from the World Gold Council on the gold reserve holdings of central banks, and the trends on the central bank actions are quite interesting.

Anyway to start, it isn’t a mystery that gold, along with other commodities, have been rallying for some years now:

Unlike other commodities however, gold isn’t really consumed, but rather held as a reserve currency against existing fiat currencies. From the reserve asset statistics of the World Gold Council, it’s possible to have a look at Central Bank reserves for the same period as the rise in gold above. Here are the top 16 holders of gold, as measured in metric tonnes, as of 1st quarter 2008:

The first Central Bank Gold Agreement (also known as the Washington Agreement on Gold) was announced on September 26, 1999. The agreement to limits on central bank sales of gold was reaffirmed five years later; the second agreement came into force on September 27th 2004 and will run until 2009.

The agreement was a communique from the following banks:

Oesterreichische Nationalbank
Banca d’Italia
Banque de France
Banco do Portugal
Schweizerische Nationalbank
Banque Nationale de Belgique
Banque Centrale du Luxembourg
Deutsche Bundesbank
Banco de España
Bank of England
Suomen Pankki
De Nederlandsche Bank
Central Bank of Ireland
Sveriges Riksbank
European Central Bank

In the interest of clarifying their intentions with respect to their gold holdings, the above institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.
2. The above institutions will not enter the market as sellers, with the exception of already decided sales.
3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tonnes and total sales over this period will not exceed 2,000 tonnes.
4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.
5. This agreement will be reviewed after five years

In light of this agreement, from the data above, it’s possible now to construct a table that computes the net change, quarter-on-quarter of the gold holdings of those respective reserve banks. This can be charted as a quarterly change:

One trend is that, at least for the largest holders of gold reserves, they have been largely selling into the gold rally. Note the large selling of the Swiss early in the early stages of the gold rally, and the French and ECB in the more recent years.

Actually, comparing the average gold spot price with the level of gold reserves shows along with France and the ECB, it’s been the European banks who have been selling into the gold rally.

You can contrast this with reserve banks of Venezuela, China, and Russia, who have been buyers into the rally.

From this data, there are a number of questions that arise? Why are the European banks selling gold?

Julian Philips wrote an article last June 2007 about the Swiss National Bank’s annoucement then about their planned sale of 250 tons of gold. From the data above, looks like this is already taking place as we speak. The reasoning cited by Philips was that Switzerland, being a haven country for a lot of foreign capital, so has vested interest in maintaining a spread of foreign currencies as reserves.

So does the same logic hold for the other European banks, who have joined the selling? A more recent article argues that Europeans are defending the Euro from following the dollar’s decline. So the gold sales help drive european reserves to help protect the Euro considering the value of the dollar has also declined against the Euro and Swiss Franc over the same period as the rise in gold.