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The Important Impact of This "Secret" Agreement

The fourth iteration of the Central Bank Gold Agreement (CBGA) has just been signed.

Essentially, it’s a statement by Western Europe’s most powerful central banks about how much gold they’re willing to sell over the next five years.

Though done with no fanfare and barely any media coverage, its importance can’t be overstated.

The real story lies with who hasn’t signed, and what they’re doing with their gold…

Below-the-Board Dealings Are Rampant

In the recent announcement, one statement made by the CBGA’s members affirms, “The signatories will continue to coordinate their gold transactions so as to avoid market disturbances.” 

While that sounds harmless and perhaps even helpful, it’s not.

The Gold Anti-Trust Action Committee (GATA), a gold price manipulation watchdog group, rightly points out:

    Of course that statement is meant to be construed as saying that the participating central banks don't want to be the ones to "disturb" the gold market. But then by definition a free market is always subject to "disturbances" arising from the interaction of its many participants. What matter is it to central banks if the gold price is "disturbed" any more than the market for pork bellies is "disturbed" – unless, of course, gold, unlike pork bellies, has a powerful influence on financial instruments of vital importance to central banks, instruments like currencies, government bonds, and interest rates, unless gold is, to central banks, the most dangerous form of money, a form potentially independent of central bank control?

We just can’t count on central banks to help maintain a free market in gold. Apparently, neither can we rely on the century-old London Gold Fix.

And there are other reasons to wonder about CBGA members’ influence…

Whether or not the signatories of this agreement even have gold to sell is another matter entirely.  Some market observers point out that many western Central Banks have leased out most or all of their gold.

Indeed, several refer to their gold reserves as “Gold, including gold swapped and on loan,” or some variation of this.  Unlike gold, accounting tricks are never in short supply.

After all, if the gold was really all there, why would Germany need eight years to repatriate its 742 tons? So far only 76 tons have returned, a pace that’s running way behind schedule at less than half the monthly target.

The attraction?  “Gold swaps” and “gold leases” allow central banks to turn their gold holdings into a more “productive asset”; one that provides yield. It’s a tempting sales pitch to which many a central banker has succumbed. 

The most recent victim: Ecuador.

“Help” from the “Vampire Squid”

In order to deal with its massive $4.94 billion budget deficit, 55% of Ecuador’s gold reserves, worth about $580 million, will be shipped off to Goldman Sachs.  In exchange, the Goldman will provide “instruments of high security and liquidity.” 

Very reassuring, coming from the company once famously dubbed the “Vampire Squid” for having its unsavory tendrils into everything.

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About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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  1. Eric | July 31, 2014

    So who hasn't signed the agreement?

  2. Daniel Martin | July 31, 2014

    This article leads with "The real story lies with who hasn’t signed, and what they’re doing with their gold…" – something the article never gerts around to saying.

    So who are the ones who have NOT signed and what are they doing with their gold?

  3. Peter Krauth | July 31, 2014

    Please excuse me for not addressing these issues specifically.

    The biggest standout, since the first iteration of the CBGA back in 1999, is the Federal Reserve. I guess they don’t like the idea of ‘committing’ to any kind of gold sales limit. The next most conspicuous standouts are the large Western economic powers of the U.K. and Japan who likely are absent for the same reasons as the U.S. Gold swaps and gold leases make disposing of gold (without it looking obvious) a lot easier.

    Besides, QE is a lot more fun. Not so conspicuously absent are major gold holders China, India, Russia and Brazil. Obviously, Ecuador is not a signatory, and they’ve gladly agreed to be taken to the cleaners. It will be very interesting to see if any of Ecuador’s ‘leased’ gold ever returns.

    Many thanks,
    Peter Krauth

  4. Khawar | August 2, 2014

    Imagine what happens after the Ecuadorian gold is shipped of to those demanding physical gold from the banks in exchange for oil and goods.
    Then you shall know that the bank reserves of the XAU is again nonexistent. Unlike USD or other currencies which can be printed on paper or on virtual numbers in an account, you cannot print Gold as easily.
    That is why Gold is really valued at about 17,000 USD per ounce these days.
    At least 10x its paper value. Talk about a low PE Ratio if you ever saw one.
    — Khawar Nehal

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