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Central Bank Gold Agreements

The third Central Bank Gold Agreement (CBGA3)Download the latest CBGA3 sales

Change in official gold holdings (tonnes) - click to enlarge

Western central banks have more than a decade-long history of gold Agreements with each other and with the private sector. The third Central Bank Gold Agreement (CBGA3) currently in force covers the gold sales of the Eurosystem central banks, Sweden and Switzerland. Like the previous two Agreements, CBGA3 covers a five-year period, in this case from 27 September 2009 (immediately after the second Agreement expired) to 26 September 2014.

The third Central Bank Gold Agreement reaffirmed that "gold remains an important element of global monetary reserves", as was stated in the two previous Agreements.

This Agreement also included two important departures from the prior Agreements.

First, the collective ceiling was reduced so that "annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes", 500 tonnes lower than the 2,500 tonnes five-year ceiling provided for in the second Agreement.

As signatories to CBGA2 had significantly undersold the permitted annual ceiling in the final two years of that Agreement, the new lower ceiling did not come as a surprise to market participants and had no impact on the gold price.

The second significant difference in the Agreement recognised the fact that the IMF intended to sell 403 tonnes of gold, and stated that these sales "can be accommodated within the above ceiling". The market took this announcement in its stride, as the IMF had clearly stated beforehand that its planned sales would be conducted in a manner that would not add net new supply beyond what the market was already expecting from the official sector as a whole. In the event that the IMF is unable to arrange an off-market sale with another official sector institution, the sales will be conducted through the new CBGA3.

This third Agreement covered the 15 original signatories to CBGA2 (the European Central Bank and the national banks of Belgium, Germany, Ireland, Greece, Spain, France, Italy, Luxembourg, The Netherlands, Austria, Portugal, Finland, Sweden and Switzerland), together with the national banks of Slovenia, Cyprus, Malta, which all joined CBGA2 on (or in Slovenia's case just prior to) adopting the euro, and national bank of Slovakia.

In both the previous Agreements, signatories undertook not to increase their activities in the derivatives and lending markets above the levels of September 1999, when the first CBGA was signed. The new Agreement includes no similar commitment, although central bank activity in these fields has been very limited in recent years.

ECB Press release - Joint statement on gold, August 7th 2009

The IMF gold salesThe IMF’s Executive Board approved the sale of 403.3 tonnes in September 2009, representing one eighth of the Fund's total gold holdings. The process began with the Crockett Report in 2007, which recommended that the IMF adopt a new income model, including the establishment of an endowment, funded by the proceeds of limited and structured gold sales.

The IMF conducted the first phase of these sales in off-market deals with other central banks, thereby leaving the stock of gold in the official sector unchanged. The IMF sold a total of 222 metric tons to four central banks: the Reserve Bank of India (200 tonnes), the Central Banks of Sri Lanka and Bangladesh (10 tonnes each), and Mauritius (2 tonnes). The IMF began phased on-market sales in February 2010 and has sold around 15-20 tonnes of gold per month since that date.

IMF Press release – IMF to begin on-market sales of gold

The second Central Bank Gold Agreement (CBGA2)On March 8th 2004, the signatory banks announced the second Central Bank Gold Agreement. Like the first Agreement, CBGA2 covered a five-year period, in this case from September 27th 2004 (immediately after the expiry of the first Agreement) to September 26th 2009.

The second Agreement started by reaffirming the first clause in the 1999 Agreement: “Gold will remain an important element of global monetary reserves.” While the rest of the Agreement covered similar ground to the first, there were some important differences.

The UK signed the first Agreement but not the second (at the time the second Agreement was announced it stated that the UK government had no plans to sell gold). Greece, which was not a member of the Eurozone in 1999, did not sign the first Agreement but signed the second. Slovenia became a signatory to the second Agreement in December 2006, shortly before adopting the euro as its currency. Cyprus and Malta also joined CBGA2 just after they joined the euro.

The maximum amount of gold that the signatories could sell over the five years was 2,500 tonnes, compared to 2,000 tonnes in the first Agreement. In the first Agreement, the wording specified that annual sales would not exceed approximately 400 tonnes. The second Agreement stated that annual sales would not exceed 500 tonnes. In addition the first Agreement referred to “already decided sales” but the second referred to “sales already decided and to be decided”.

Subsequently, it became clear that the signatories had sold significantly less than the pemitted ceiling they had set themselves.

As regards gold lending, the second Agreement stated that the signatories agreed that “the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the start of the date of the signature of the previous Agreement”.

Observers generally believed that gold leasing had declined during the period of the first Agreement so the second Agreement gave some limited scope for expansion.

ECB Press release – Joint statement on gold, March 8th 2004

The first Central Bank Gold Agreement (CBGA1)The Central Bank Gold Agreement (also known as the Washington Agreement on Gold) was announced on September 26, 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) so their actions were of key interest to the gold market.

Much of this interest focused on the central banks of Western Europe. Many of these held - and still hold - substantial stocks of gold in their reserves. Some (Netherlands, Belgium, Austria, Switzerland and the UK) figured among those banks which had recently sold gold or announced plans to do so. At the same time, with rising demand for borrowed gold, a number of central banks were increasing their use of lending, swaps and other gold derivative instruments. Due to the workings of the gold derivatives market, an increase in gold lending normally results in additional gold being sold. That’s why this growth in lending was adding to the amount of gold supplied 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. The market falls caused 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, fifteen European central banks (those of the then 11 Eurozone countries plus the European Central Bank and those of Sweden, Switzerland and the UK) drew up the first Central Bank Gold Agreement.

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% of global gold reserves. In addition a number of other major holders - including the US, Japan, Australia, the IMF and the BIS, either informally associated themselves with the Agreement or announced at other times that they would not sell gold. Including these, the proportion of gold reserves covered by the Agreement or a similar announcement rises to around 85%.

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

The ECB and GoldIn one of its first pronouncements, the Governing Council of the European Central Bank (ECB) decided that the national central banks participating in the euro area should include gold in the initial transfer of foreign reserve assets to the European Central Bank. The transfer was to take place on the first day of 1999, the launch date of the euro as a single currency.

The Governing Council decided the initial transfer of foreign reserves would be to the maximum allowed amount of EUR 50 billion. This figure was adjusted downwards by deducting the shares of those EU central banks which would not participate in the euro area at the outset i.e. to a total of approximately EUR 39.46 billion.

The ECB agreed that 15% of this initial transfer should be in gold, a clear demonstration of the fact that European central bankers continued to believe that gold strengthened the balance sheet of a central bank and enhanced public confidence. The ECB indicated clearly that these transfers of gold would not affect the total consolidated gold holdings of the Eurozone. The remaining 85% was transferred in foreign currency assets. Also there was no implication that the ECB would maintain a constant ratio of 15% of its reserves in gold in the future. Indeed, despite a number of sales, gold’s share of the ECB’s total reserves has grown considerably since then due to the sharp increase in the gold price. As at September 2010, the ECB had 26% of its reserves in gold.


Historical Agreements1978 - The IMF attempts to write gold out of the systemThe Second Amendment of the IMF Articles was intended to delete gold from the international monetary system. The amendment followed the failure of previous attempts to establish a new international monetary system. In particular these included the failure of European countries to force the United States to either settle its deficit in gold, or else devalue the dollar against gold.

Not only did the United States refuse to keep gold in the system, it then led a crusade against gold (while being careful to keep a very large strategic stock of gold in its own reserve, sealed off from the outside world).

This Second Amendment of the Articles barred members from fixing their exchange rates to gold and removed the obligation on members to conduct transactions in gold at the official gold price.

Symbolising the plan to drive gold out of the system, the IMF was instructed to dispose of 50 million ounces of its gold stock of 153 million ounces. It achieved this partly by sales to the market and partly by giving some gold to members in relation to their quotas.

Ironically, this exercise had the effect of spreading gold much more widely through the international community than ever before, and gave many countries a new interest in the gold market. Few countries showed any inclination to sell the gold handed to them, and in the vast majority of cases it continues to sit on their books.

Early 1960s – Central banks try to stabilise the price of goldThis “gentlemen’s agreement” among central banks - known as ‘The Gold Pool’ - was established to hold the price of gold close to the then official price of $35 an ounce. It followed a speculative attack on the dollar that brought the price up to $40 an ounce.

According to the Bank of England, “this state of affairs threatened the whole structure of exchange relationships in the western world”. The Bank, with the support of the US authorities, therefore sold gold on a substantial scale to bring the price down “to more appropriate levels”. Following a further speculative flurry the following year, in October 1961 the central banks of Western Europe agreed to cooperate with the New York Federal Reserve Bank to stabilise the market.

A period of coordinated gold purchases followed the change of market conditions. However, the Cuba missile crisis of July 1962 triggered record demands for gold on the London market, which was again met by official selling. The objective throughout was to “avoid unnecessary and disturbing fluctuations in the price of gold in the free market”.

The Bank of England’s conclusion on this experiment was that “the knowledge that the central banks were working together in the gold, as well as in the exchange markets, has helped to maintain public confidence in the existing international monetary structure”.

The central banks abolished The Gold Pool in 1968, agreeing that they would no longer supply gold to the market but transact only among themselves (at the official price). This established a two-tier system – one for private transactions, where the price fluctuated according to supply and demand, and the other for official transactions at the official price.

This agreement lasted until November 1973, when the price of gold was allowed to move freely, following the suspension of dollar convertibility into gold in August 1971.

1944 - Establishment of the IMF puts gold at the centre of the new international monetary systemThe first international agreement on gold came with the signing of the IMF’s articles of agreement in July 1944. These laid down that all member countries should establish “par values” for their currencies in terms of gold, or in terms of the US dollar which was itself defined in terms of gold.

One dollar was valued at 0.888671 gram of fine gold, or $35 an ounce. The agreement confirmed the price of gold as established by President Roosevelt in 1933. Gold became the foundation of the first international monetary system established by international agreement. It was the “glue” that held the system of exchange rates together.

To give the new IMF usable resources to enable it to start lending, members were also required to pay 25% of their subscription to the Fund in gold. Members had to buy and sell gold at the fixed price (plus or minus a margin set by the IMF). Gold was the ultimate reserve asset.

This requirement and the growth of membership resulted in IMF holdings of gold rising to 153 million ounces by 1975, at the time worth $21 billion.

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