Central banks and international institutions have been the major holders of gold for more than 100 years and are expected to retain large stocks in future. They currently account for about 20% of above-ground stocks of gold.
Central banks started building up their stocks of gold from the 1880s, during the period of the classical gold standard. Under that system, for countries on the gold standard, the amount of money in circulation was linked to the country's gold stock, and paper money was convertible into gold at a fixed price.
The period of economic nationalism between the two world wars saw a rapid concentration of gold in official hands - up to that point, most gold had always been held privately, circulating as currency among citizens and across borders in commercial trade transactions.
The process of rebalancing reserve portfolios to adjust to changing conditions has led to a reduction in the amount of gold held by some central banks recently and this process may continue for some years to come. But the central banks have affirmed that gold will remain an important reserve asset for the foreseeable future and it retains an important role in reserve management.
Central banks started building up their stocks of gold from the 1880s, during the period of the classical gold standard. Under that system, for countries on the gold standard, the amount of money in circulation was linked to the country's gold stock, and paper money was convertible into gold at a fixed price.
The development of banking and credit meant that the amount of money in circulation was greater than the gold stock itself, but everybody had sufficient confidence in convertibility that there was no danger of this option actually being exercised. That at least was the case during the height of the gold standard for the UK, the then dominant economic, political and financial power. As other countries decided to join the gold standard, they also started to accumulate gold so as to be able to maintain convertibility at a fixed price.
The Bank of England, as the central bank at the centre of the system, commanded such universal confidence that it actually needed very little gold. In 1870, its reserves were 161 tonnes and by 1913 this had risen to a still moderate figure of 248 tonnes.
Some other countries had by then accumulated much larger stocks: the United States had 2,293 tonnes, Russia 1,233 tonnes, France 1,030 tonnes, Argentina 440 tonnes, Germany 439 tonnes, Austria 378 tonnes and Italy 356 tonnes. Even Australia had more than the UK, at 310 tonnes. The world's total of official gold reserves is estimated to have been about 8,100 tonnes in 1913, compared with only 700 tonnes in 1870.
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| Percentage of gold holding in total reserve held by the Central Banks of top 12 countries in 2010 |
Some other countries had by then accumulated much larger stocks: the United States had 2,293 tonnes, Russia 1,233 tonnes, France 1,030 tonnes, Argentina 440 tonnes, Germany 439 tonnes, Austria 378 tonnes and Italy 356 tonnes. Even Australia had more than the UK, at 310 tonnes. The world's total of official gold reserves is estimated to have been about 8,100 tonnes in 1913, compared with only 700 tonnes in 1870.
The period of economic nationalism between the two world wars saw a rapid concentration of gold in official hands - up to that point, most gold had always been held privately, circulating as currency among citizens and across borders in commercial trade transactions.
Gold, which had been the foundation of the first genuinely international monetary system during the period before World War 1, came to be used as a weapon in economic competition and national rivalries.
In 1933-34, the United States under President Roosevelt devalued the dollar in terms of gold, raising the price from $20.67 an ounce to $35.00 an ounce. This new higher price caused holders of gold around the world to sell their holdings to the United States. US official holdings rose from 6,000 tonnes in 1925 to 18,000 tonnes at the end of World War II, when it had about 60%of all the official stocks of gold.
At their peak in the 1960s, official gold stocks reached about 38,000 tonnes and probably accounted for about 50% - or perhaps slightly more - of all above ground stocks.
Central banks kept gold because, through the fixed official dollar price of gold, and dollar convertibility, it was still the foundation of the international monetary system. Although there was no direct link between gold holdings and national money supplies (as there had been under the classic gold standard), gold was still the primary "reserve asset". Central banks could convert dollar balances into gold at the official price.
So gold provided the "anchor" to which all currencies of member countries were linked, directly or indirectly. But gradually, as central banks created more money than was consistent with stable prices, and after several years of moderate but persistent inflation, the fixed official gold price again became unrealistic, and the United States, as the pivot of the system, was faced with the choice of deflating, devaluing or abandoning the system. In August 1971, it abandoned the system, with President Nixon "closing the gold window".
The previous twenty years had already seen a big shift in the ownership of official gold holdings. The post-war recovery of Europe and undervalued exchange rates generated large payments surpluses for Germany, France and other European countries and widening deficits for the United States - deficits that were financed partly by transferring gold. Thus US holdings fell from about 20,000 tonnes in 1950 to 9,000 tonnes in 1971. When in that year President Nixon suspended the convertibility of dollar balances into gold, the world entered the present floating exchange rate regime, where gold's role is confined to that of being one reserve asset, rather than the centre of the system.
The previous twenty years had already seen a big shift in the ownership of official gold holdings. The post-war recovery of Europe and undervalued exchange rates generated large payments surpluses for Germany, France and other European countries and widening deficits for the United States - deficits that were financed partly by transferring gold. Thus US holdings fell from about 20,000 tonnes in 1950 to 9,000 tonnes in 1971. When in that year President Nixon suspended the convertibility of dollar balances into gold, the world entered the present floating exchange rate regime, where gold's role is confined to that of being one reserve asset, rather than the centre of the system.
This cleared the way for the dollar to establish itself at the centre of the system and a large part of the world moved in effect onto a dollar standard. Indeed, under US pressure in 1978 the articles of the IMF were altered so as to forbid countries to peg their currencies to gold (a kind of anti-gold standard).
In the 1980s and 1990s central banks began re-appraising the role of gold in their external reserves. The movement to central bank independence and the more commercial attitude of their reserve managers led some of them to put more emphasis on the current yield on their reserve portfolios. In this environment, gold, as an asset that earns no interest - apart from a small return available from lending gold for those central banks willing to engage in the lending market - began to look vulnerable. Some central banks decided to reduce their gold holdings, and the total of official stocks declined by about 10% between 1980 and 1999.
In the 1980s and 1990s central banks began re-appraising the role of gold in their external reserves. The movement to central bank independence and the more commercial attitude of their reserve managers led some of them to put more emphasis on the current yield on their reserve portfolios. In this environment, gold, as an asset that earns no interest - apart from a small return available from lending gold for those central banks willing to engage in the lending market - began to look vulnerable. Some central banks decided to reduce their gold holdings, and the total of official stocks declined by about 10% between 1980 and 1999.
In September 1999, a group of European central banks agreed, in the first Central Bank Gold Agreement CBGA 1, to limit disposals to 400 tonnes a year for five years, and also set a ceiling on the volume of gold lent to the market. They also reaffirmed their confidence in the future of gold as a reserve asset. The agreement reassured the market about the intentions of central banks, since the signatories included those that had been seen as the most likely major sellers, and the price, which had reached a low of $252 an ounce in July 1999, stabilised. CBGA 1 proved very successful and was renewed CBGA 2 for a further five year term in 2004.
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