THE SHOCK NEWS THAT MADE GOLD PRICE SOAR / THE FINANCIAL TIMES

March 11, 2013 6:31 pm

 

The shock news that made gold price soar

 

By Claire Jones

 

Central banks boosted the bullion market by limiting their sales of the metal

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Behind the scenes at the IMF’s round of annual meetings, 15 central banks had signed up to a five-year commitment to sell no more than 400 tonnes of gold a year between them.

Central banks have spooked markets before. In the 1990s it was gold – not foreign exchange – traders who had the most to fear from the actions of the world’s monetary guardians.


As confidence grew that the problem of inflation had been solved, central banks began to question the wisdom of holding gold, long regarded as a hedge against price pressures.


Increasingly viewed as a cumbersome asset that was expensive to store and yielded no fixed return, central banks, which at the time owned a quarter of gold above ground, began to sell, with some using the proceeds to invest in government debt.


The US Federal Reserve, the world’s biggest gold holder, was always unlikely to divest of its bullion. But others across Europe were soon following the lead set by the National Bank of Belgium in 1992. In the late 1990s, the Bank of England and the Swiss National Bank, then big holders of bullion, announced planned sales. The gold price plunged.


Statements by central banks, including the Banque de France, one of the biggest holders of bullion, failed to pare the losses.


Concerned, the World Gold Council, a producer-funded trade body, stepped up its efforts to remind central bankers of the motives for holding gold, notably as a long-term store of value.


Then at meetings on the fringes of the Bank for International Settlements in Basel, central bankers that remained attached to gold voiced fears that the behaviour of their peers was destabilising the market. Those intent on selling considered action necessary to stabilise the price. Cue Mr Duisenberg. In the days following his announcement, the gold price soared.


More than a decade on, central banks remain tied to commitments on gold sales. In recent years, monetary authorities have become net buyers of bullion.

 

Copyright The Financial Times Limited 2013.