banks favor gold amid credit crisis
by Jan Harvey
Sales of gold by European
central banks are likely to be lower than
expected over the next year as the global
banking crisis boosts bullion's appeal as a
“safe” reserve asset.
And banks elsewhere in the world, most notably
in Asia and the Middle East, may even become
buyers of gold in an attempt to diversify their
reserves away from the U.S. dollar, analysts
Under the terms of the Central Bank Gold
Agreement, signed in 1999 by key European
institutions including Germany's Bundesbank and
the European Central Bank and renewed in 2004,
members can sell up to 500 tonnes of gold a
But in the fourth year of the latest agreement,
which ended last Friday, sales fell well short
of this ceiling, to just over 357 tonnes.
With banks worried by the outlook for the
financial sector, sales could be even lower in
the final year of the pact.
“Given the damage done to a lot of other paper
assets that were formerly considered secure,
there will be greater risk aversion among
central banks,” said Philip Klapwijk, executive
chairman of metals consultancy GFMS. “This will
only boost gold's status within central bank
A key reason why central banks want to hold onto
gold is the instability of their most common
reserve asset, the dollar.
The U.S. currency slipped to record lows against
the euro earlier this year, and although it has
since taken on a firmer tone, doubts remain over
“Gold assets have moved up in value in euro
terms whereas dollar assets have fallen
considerably,” Mr. Klapwijk said. “There has
been a reassessment of gold given developments
in last few years.”
Aside from the pressures associated with the
current financial crisis, with a number of
European central banks now having completed
previously announced sales programs, analysts
say a dip in selling is to be expected.
Germany's Bundesbank, with the second largest
gold reserves in the world after the U.S.
Federal Reserve, said this week it would make no
gold sales over the next 12 months, aside from a
small sale already agreed with its finance
The Swiss National Bank also said on Monday it
had completed the sale of 250 tonnes of gold it
announced last June, and had no plans for
The correction in the gold price from the
all-time high of $1,030.80 (U.S.) an ounce it
hit in March is also relieving some of the
pressure on banks to sell gold to rebalance
“One reason people had been selling was because
the gold price had risen and therefore the
reserve value, relative to foreign exchange, had
increased,” said RBS Global Banking & Markets
commodity strategist Nick Moore.
“There was some selling pressure in order to
rebalance reserves back to levels people were
“The fall in the gold price from over $1,000
puts us in a situation where the percentage of
gold as a proportion of banks' reserves will be
lower, so that will take some pressure off for
rebalancing,” he added.
CBGA signatories aside, some central banks are
more likely to be buyers than sellers of gold as
the outlook for financial markets and the dollar
stays rocky, analysts say.
These purchases are most likely to come from
Asian and Middle Eastern central banks looking
to diversify their dollar assets into gold than
their European counterparts.
“Central banks flush with dollars in Asia and
the Middle East may try to diversify into gold,”
said Calyon metals analyst Robin Bhar. “The
argument in favour of that may have been made
stronger by recent events, which may encourage
more diversification away from depreciating