Unexpectedly, two dozen central banks nixed a gold pact they had sealed years earlier. With the price of gold already at a six-year high – how far will it go?
The agreement, which came into force in 1999 and was canceled last week, aimed at coordinating the sale of gold by central banks across Europe in a way designed to keep the price of the metal steady. The large-scale offloading of the precious metal came after a reevaluation of the function of gold in central bank policymaking.
The erstwhile link between the U.S. dollar and the gold price had lent the metal a crucial role in monetary policy. However, gold became free-floating in 1973 only after the Bretton Woods system had been abolished. The link between currencies and gold lost its predominance.
Speed of Development
Several central banks harbored such intentions and therefore they sat together and came up with a plan to prevent undue downward pressure on gold – the Central Bank Gold Agreement (CBGA) of 1999. Now, after a three-time extension of five years each, the pact has reached its end.
The reason behind this step was the maturing of the gold market, but also the fact that none of the participating banks had been an active seller recently.
Increase in Risks
It means that gold nowadays is one investment opportunity among others. Geopolitical uncertainties, Brexit, the escalation in Hong Kong, war risks in the Gulf or also the negative interest rate environment might all contribute to a further rally.
Several central banks – among them the banks of China, Russia, India, and Turkey – acquired significant amounts of gold in recent years, not least to reduce dependence on the dollar.
Still More Scope
This year so far, gold has added 12 percent in value. The ounce reached the threshold of $1,400 in recent days – but the record of $1,900 reached in 2011 is still a long way off.
The boom doesn’t look to abate anytime soon. The U.S. Federal Reserve cut its benchmark interest rate on Wednesday, which will lead to a weakening of the dollar and hence boost the price of gold. The dollar and gold tend to move in opposite directions.
