Archived World Gold Council Document

The official launch of the European Central Bank (ECB) this week and the approach of European Monetary Union (EMU) raise a number of interesting possibilities for gold in the official sector, but the lack of transparency in the activities of central banks in the gold market may be misleading traders, analysts and investors.

During the last few years an increasing number of central banks - over 70 at the latest count - are now actively managing their gold reserves to improve the return on their holdings.

These banks have been especially active in the gold leasing and swaps markets, and in the past two years alone Gold Fields Mineral Services (GFMS) estimates that the official sector has mobilised another 1,000 tonnes. Two-thirds of this came last year and brought the total of central bank gold in the market to above 3,700 tonnes, equivalent to the total holding of Germany's Bundesbank.

The lack of transparency in these arrangements has created the impression that more gold has been sold than is the actual case. IMF statistics show that total gold holdings in the official sector have declined by only 2.6% over the past three years - from 34,781 tonnes at the end of 1994 to 33,860 tonnes at the end of 1997 - just 921 tonnes.

This contrasts very strongly with the perception that there has been a wave of central bank selling. There have been a number of high-profile sales from countries such as Argentina and Australia and earlier this year the Belgians disclosed having sold 299 tonnes. But this latter sale was conducted through five other central banks and the IMF statistics would seem to indicate that gold from several of the other central bank 'sales' have ended up in other official holdings.

The Bank of Portugal is one central bank which has admitted to using gold swaps as part of its policy to secure the maximum possible yield from its reserves, but it has not sold any gold. The Austrian central bank also makes no secret of its use of gold swaps and recently revealed that its holdings had 'fallen' by 83.2 tonnes but this was not represented by outright sales. It reflected mainly an increase of 69.7 tonnes in gold swaps which will return to reserves on maturity.

Gold swaps and deposits by the official sector have risen significantly in recent years to meet an increase in the demand for liquidity in the market. This may have clouded perceptions to the point where some of these lending operations have been misinterpreted as outright sales and have contributed to the negative market sentiment for gold.

However, there have also been a significant number of central banks adding to their gold holdings. GFMS estimates that some 19 countries purchased around 438 tonnes of gold in 1997. Part of this buying consisted of local mine production but the outcome overall was that net official sector sales were around 406 tonnes. This was considerably less than the net 622 tonnes sold in 1992 and the 494 tonnes sold in 1993, all of which was absorbed by the market without major upheaval. Indeed, without these sales there would have been a significant deficiency in the market as total consumption exceeded mine production by 1368 tonnes in 1992, 1254 tonnes in 1993 and 1790 tonnes last year.

Contacts:
Robert Pringle or Dick Ware,
CPPS, World Gold Council
+ 44 (0) 207 930 5171
Keith Irons, Bankside Consultants
+ 44 (0) 207 220 7477