Is Open Season for Central Bank Gold Buying About to Begin?

On July 26, the European Central Bank (ECB) made an announcement that could have an impact of future gold prices. According to Reuters, European central banks ditched a 20-year-old agreement to coordinate their gold sales, saying they have no plan to sell large amounts of the metal, the ECB said on Friday.

ECB Press Release

“>Signatories of the fourth Central Bank Gold Agreement no longer see need for formal agreement as market has developed and matured.”

“>Signatory central banks confirm gold remains an important element of global monetary reserves and none of them currently has plans to sell significant amounts of gold.”

“The European Central Bank (ECB) and 21 other central banks that are signatories of the Central Bank Gold Agreement (CBGA) have decided not to renew the Agreement upon its expiry in September 2019”

“The first CBGA was signed in 1999 to coordinate the planned gold sales by the various central banks. When it was introduced, the Agreement contributed to balanced conditions in the gold market by providing transparency regarding the intentions of the signatories. It was renewed three times in 2004, 2009 and 2014, gradually moving towards less stringent terms.”

“Since 1999 the global gold market has developed considerably in terms of maturity, liquidity and investor base. The gold price has increased around five-fold over the same period. The signatories have not sold significant amounts of gold for nearly a decade, and central banks and other official institutions in general have become net buyers of gold.”

“The signatories confirm that gold remains an important element of global monetary reserves, as it continues to provide asset diversification benefits and none of them currently has plans to sell significant amounts of gold.”

Why Now?

The decision to not renew the agreement highlights how sentiment toward the precious metal have changed since the global financial crisis. Additionally, European central banks have become net purchasers since the 2008 financial crisis, with Poland and Hungary most recently building up gold assets on a large-scale.

“There has been a sea change in central banks’ attitudes toward gold since the financial crisis,” said Natalie Dempster, a managing director at the World Gold Council. “Europe is itself now a net buyer of gold – no one needs a sales agreement anymore.”

Keep an Eye on the Central Banks

According to BullionStar, “…this latest news about the non-renewal of the CBGA is important because it is the best evidence yet that there most likely is an unpublished agreement among the participating European central banks not to buy any gold, but that this private agreement not to buy gold is now being torn up. Which would mean that open season for central bank gold buying is about to begin.”

Others are saying there could be increased fears of central bank selling.

My take is that the news should lead to increased volatility in the gold market.