The rebuilding of central bank gold reserves since the financial crisis in 2008 marks the latest phase in a two centuries-long cycle of changing policies on the yellow metal, which fall into seven distinct periods or ages.
The Seven Ages of Gold have each lasted an average of around 30 years. And the current, “Rebuilding” period is the longest protracted spell of gold accruals since 1950 to 1965, when central banks and Treasuries acquired a net total of more than 7,000 tonnes during the economic recovery after the second world war.
Since 2008 central banks have added more than 2,800 tonnes or 9.4 per cent to reserves, equal to annual net purchases of 350 tonnes. This brings purchases in line with the 100-year average up to 1970 — reflecting the metal’s renewed attractiveness as a safe haven asset in an environment of low or negative interest rates.
One reason for gold’s renaissance as a monetary asset has been developing countries’ hesitancy about relying unduly on reserve holdings in dollars. China, in particular, seems to be following a strategy of using gold to counter the weight of the dollar.
Last year China lifted part of the veil over its gold reserves, breaking a six-year silence to reveal holdings of 1,658 tonnes as of June 2015 against the previously reported figure of 1,054 tonnes. As of this August it had 1,823 tonnes.
Beijing moved to a market valuation of gold, which, according to latest figures, is worth $70.5bn, although this makes up only 2.3 per cent of total Chinese international reserves. China’s total official gold holdings are judged to be sizeably larger, as metal from local mine production is believed to be held in a domestic account separate from the international gold holdings.
While developing countries have been building their reserves, developed countries (accounting for the lion’s share of total official holdings) have been conserving stocks. European central banks signed a five-year agreement in 1999, renewed in 2014, pledging a restrictive policy on gold sales until 2019. One important reason behind this is that many banks inside the euro area regard their gold reserves as a hedge against potential monetary losses from imbalances and tensions affecting the single currency.
The world’s biggest official gold holder is the US, with 8,134 tonnes — more than four times that of China and more than five times Russia’s 1,499 tonnes — followed by Germany with 3,378 tonnes, the IMF with 2,814 tonnes, Italy with 2,452 tonnes and France with 2,436 tonnes.
The Seven Ages of Gold started with the “Pre-Gold Standard” period before German unification in 1871, which triggered the widespread introduction of the system in which central banks’ gold sales and purchases at a fixed price effectively regulated the world economy.
Broad international adoption of the gold standard ushered in the second period, from 1871 to 1914, when central banks became the guardians of a fixed-price system. That was followed by the “War Economy” age that ran from 1914 to 1945, spanning the reintroduction of the gold standard, the interwar depression, and the gold standard’s ultimate demise in the 1930s.
Then there was the 1945-73 period — the Bretton Woods era of rising gold reserves. During the “Demonetisation”, or fifth period between 1973 and 1998, gold’s role was in limbo after it was officially phased out of the monetary system. The “Sales” period that followed from 1998 to 2008, central banks, particularly in developed countries, were unloading bullion holdings.
Central bank gold transactions have often been somewhat disassociated from the gold price. Central banks were net sellers in periods five and six, four decades of fluctuating but generally rising bullion prices. The current period since 2008 has been a time of sharp price swings in the $1,000 to $1,600 per ounce range. However, central bank purchases appear to have been a factor behind the post-2015 price recovery.
Based on long-term figures for gold holdings and world production, gold stocks in the hands of official institutions (central banks, treasuries and bodies such as the International Monetary Fund) appear to have steadied at around 17.4 per cent of total above-ground stocks. This is down from 23 per cent in 2000 and 40 per cent in 1970, but marks stabilisation over the past decade following an earlier period in which central banks were net sellers.
After the rises and falls of the postwar period, total gold holdings are back to the levels of the early 1950s. But there has been a shift over the past 70 years in gold distribution away from the US Treasury towards European countries and, latterly, developing nations — symbolising the multipolar world economy.
Illustrating this shift, the US accounts for just 25 per cent of total official holdings, compared with 19 per cent in 1900, 33 per cent in 1920, 76 per cent in 1940, 44 per cent in 1960 and 23 per cent in 1980.
In future years, as economic clout moves away from advanced economies, developing nations are likely to build up further gold reserves as a proportion of total official holdings stocks. In the further development of the Ages of Gold, the metal’s monetary renaissance that started in 2008 may have some way further to run.
David Marsh is managing director and Ben Robinson is economist at Official Monetary and Financial Institutions Forum.