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Seven ages of gold

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OMFIF newest logo 09july2016Seven ages of gold – central banks annual net gold purchases of 350 tonnes a year

Central banks are turning back to gold purchases in line with a century of practice between 1870 and 1970. This has restored the yellow metal as a central element of monetary management after four decades of attempted demonetisation, according to a report from financial research group OMFIF to be published on Monday.

Annual net gold purchases of 350 tonnes a year by world central banks over the past eight years have returned to the 100-year average up to 1970 – reflecting the metal’s renewed attractiveness as a safe haven asset in an environment of uncertainty and low or negative interest rates.

The OMFIF research document – the ‘Seven Ages of Gold’ – contains detailed statistics plotting long-run changes in central banks’ policies on buying and selling gold over seven distinct periods during the past two centuries, each lasting an average of around 30 years.

The latest ‘Rebuilding’ Period VII has been underway since the financial crisis in 2008. In these eight years, central banks in both developed and developing countries have shown a new fondness for the yellow metal, rebuilding gold’s importance as a bedrock of most countries’ foreign reserves.

Central banks have been net bullion buyers every year since 2008, adding more than 2,800 tonnes or 9.4% to reserves. Developed countries (accounting for the lion’s share of total official holdings) have been conserving stocks, while developing countries led by China and Russia have been building them up. This is the longest protracted spell of gold accruals since 1950-65, when central banks and treasuries acquired a net total of more than 7,000 tonnes during the economic recovery after the second world war.

Developments since 2008 mark a powerful change from the ‘Sales’ Period VI in 1998-2008, when central banks, particularly in developed countries including the UK, the Netherlands and Switzerland, were unloading bullion holdings. This is also in sharp contrast to the ‘Demonetisation’ Period V in 1973-98, when gold’s role was in limbo after it was officially phased out of the monetary system in 1971-73.

Central bank gold transactions have often been somewhat disassociated from the gold price. Central banks were net sellers over Periods V and VI, four decades of fluctuating but generally rising bullion prices.  The latest period since 2008 has been a time of sharp price swings in the $1,000 to $1,600 per ounce range, but the eight-year switch to central bank purchases appears to have been a factor behind the price recovery since 2015.

The Seven Ages of Gold start with the ‘Pre-Gold Standard’ Period I before German unification in 1871. This 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 Period II, from 1871. Central banks became the guardians of a fixed-price system, encompassing the build-up of Australian, South African and US mining output. The ‘Gold Standard’ age ended in 1914, when the outbreak of the first world war caused suspension of the international gold system.

The ‘War Economy’ Period III runs from 1914 to 1945, spanning the reintroduction of the gold standard, the interwar depression, the gold standard’s ultimate 1930s demise and second world war dislocation that confirmed the monetary ascent of the US.

Period IV covers 1945-73, the Bretton Woods era of rising gold reserves, with European countries and Japan amassing sizeable new post-war holdings as central banks exchanged surplus dollars for gold from the US treasury.

Period V in 1973-98, after the severing of the dollar’s official link to gold and the breakdown of the fixed exchange rate Bretton Woods system, was a time of falling official holdings and sharp gold price swings in response to world geopolitical tensions.

Even after the 2,800 tonnes of purchases over the past eight years of Period VII, total official holdings – at 32,805 tonnes as of mid-2016 – are still more than 5,500 tonnes below the 1965 peak of 38,347 tonnes. After the rises and falls of the post-war period, total gold holdings are back to the levels of the early 1950s. But there has been a big shift over the past 70 years in the distribution of gold away from former near-monopoly holder the US treasury towards European countries and, latterly, developing nations – symbolising the growth of a multipolar world economy.

OMFIF Analysis – Seven Ages of Gold (Press Embargo)

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