The first Central Bank Gold Agreement

The first Central Bank Gold Agreement, also known as the Washington Agreement on Gold, was announced on 26th September 1999. It followed a period of increasing concern that uncoordinated central bank gold sales were destabilising the market, driving the gold price sharply down.

The first Central Bank Gold Agreement, also known as the Washington Agreement on Gold, was announced on 26th September 1999. It followed a period of increasing concern that uncoordinated central bank gold sales were destabilising the market, driving the gold price sharply down.

At the time, central banks held nearly a quarter of all the gold estimated to be above ground, equivalent to around 33,000 tonnes in September 1999, and had an enormously influential position in the gold markets.

The central banks of Western Europe in particular held—and still hold—substantial stocks of gold in their reserves. Those in the Netherlands, Belgium, Austria, Switzerland and the UK, had already sold gold or announced their intent to do so. Others were taking advantage of rising demand for borrowed gold and increasing their use of lending, swaps and other derivative instruments. An increase in lending typically resulted in additional gold being sold, meaning that the trend was adding further supplies to the market.

In addition to the destabilising effect of these sales, market fears about central bank intentions were causing further falls in the price of gold. This was causing considerable pain for gold producing countries. Among these were a number of developing countries, including a significant number of those classified as HIPCs (Heavily Indebted Poor Countries).

In response to these concerns, 15 European central banks—those of the then 11 Eurozone countries and of Sweden, Switzerland and the UK, as well as the European Central Bank—drew up the first Central Bank Gold Agreement, ‘CBGA1’. The agreement was signed in Washington DC, during the 1999 annual meetings of the International Monetary Fund.

In it, they stated that gold would remain an important element of global monetary reserves, and agreed to limit their collective sales to 2,000 tonnes over the following five years, or around 400 tonnes a year.

They also announced that their lending and use of derivatives would not increase over the same five-year period. The signatory banks later stated that the total amount of their gold they had out on lease in September 1999 was 2,119.32 tonnes.

The signatory banks accounted for around 45 per cent of global gold reserves. In addition a number of other major holders—including the US, Japan, Australia, the IMF and the Bank for International Settlements—either informally associated themselves with the Agreement or announced at other times that they would not sell gold.

The announcement of the agreement came as a major surprise to the market. It prompted a sharp spike in the price over the following days, but it also removed much of the uncertainty surrounding the intentions of the official sector. Once the markets had adapted to it, a major element of instability had been effectively removed with the introduction of greater transparency.

Press release – joint statement on gold, 26th September 1999