The End of the CBGA Is a Win for Gold

Precious Metals

For over 20 years central banks around the world have collaborated in planning sales of gold through the Central Bank Gold Agreement (CBGA). Central banks at the time of the agreement’s adoption were net sellers of gold, but the sale of gold by any individual central bank would have depressed the price of gold, thus leading to lower prices for other central banks looking to sell gold. Rather than selling willy-nilly into world markets, central banks decided to collude and plan their sales so as to maximize everyone’s gains.

Of course in hindsight the decision to sell gold looks absolutely foolish. Gold has been the second-highest performing asset of the past 20 years, outpacing stocks by a wide margin. Central banks essentially started selling gold right at the beginning of a great bull market. Gordon Brown, the UK’s Chancellor of the Exchequer, was notorious for selling off over half of the UK’s gold holdings, at a price of around $275 per ounce. And it’s people like him who are trusted to fix the economy during a crisis. Does that give you any confidence that central bankers will get things right during the next financial crisis?

The CBGA has basically been moot for the past eight years or so because central banks have become net buyers of gold now. While China and Russia have been leading the charge, central banks around the world continue to add to their gold holdings at a record pace. That’s not only a vindication of gold’s role in the international monetary system, but also a positive sign for gold’s future price growth.

Gold sales by central banks have been one of the number one threats to the gold price throughout history, as their large hoards and ability to make huge sales all at once have been used to try to force the gold price down. Now that central banks have given up on trying to control the gold market and are instead buying gold as insurance against economic collapse, all the signs are pointing to increased growth in the gold price. The official end of the CBGA is just the icing on the cake that points to continued growth for gold in the future.

This article was originally posted on Goldco.

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