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.
What’s more, Ecuador will earn $16 to $20 million over the three years Goldman will keep their gold “safe.” I did the math, and that works out to a paltry 1.15% annually.
Of course the central bank is all smiles, commenting:
“Gold that was not generating any returns in vaults, causing storage costs, now becomes a productive asset that will generate profits. These interventions in the gold market represent the beginning of a new and permanent strategy of active participation by the bank, through purchases, sales, and financial operations that will contribute to the creation of new financial investment opportunities.”
I have to ask, if you were acting in your nation’s best interest, would you trade half its gold to Goldman for three years, to earn 1.15%?
Right. Me neither.
Remember, central banks don’t have the greatest track record in this respect. The most egregious example is “Brown’s Bottom,” when then UK Finance Minister Gordon Brown sold off nearly 440 tons of gold at prices between $256 and $296. Ouch.
365% in Returns, Despite Big Banks’ Efforts
As far as Ecuador’s gold is concerned, together with all the other “swapped” and “leased” gold from western central banks, the most likely destination is China and Russia, along with other steadfast Asian nations.
Was this a great deal for Ecuador? Probably not. Otherwise, why would Goldman have done it? My bet is with “the squid” making serious money on this one.
If you only read mainstream media, you’d never know the CBGA agreement even exists.
And if there’s one thing to retain about the announcement of the agreement’s fourth version, it’s this statement by its signatories:
“Gold remains an important element of global monetary reserves.”
Although gold’s price may be languishing as we approach the seasonal summer doldrums, it’s not time to let down your guard and capitulate by selling your stash.
As the current “economic recovery” takes hold and perhaps even gathers steam, gold’s outlook will improve along with lending, monetary velocity, and inflation.
Remember, the first CBGA was signed in 1999 and, despite its pullback of the last three years, gold has still managed to rise by 365% to date.