Gold 2009: Central Bank Sales

GOLD HELD in central bank reserves worldwide shrank by more than one-sixth over the 20 years from 1989 to 2009.

Indeed, central bank gold sales reached such a fever pitch in 1999 that a treaty was signed by the big European banks, capping the level of central bank gold sales at 400 tonnes per year for fear of causing a collapse in gold prices.

No central bank should fear causing lower gold prices if they sell in 2009, however. Just as in the 1970s, current central-bank gold sales have in fact come against a steadily rising price in the open market.

The Central Bank Gold Agreement (CBGA) was renewed in 2004, raising the annual gold sales limit to 500 tonnes. It's due to expire again in September 2009.

But meantime, however, the financial crisis has reminded central-bank chiefs of gold's use as the ultimate international currency – the only form of money with intrinsic value. Going into 2009, central bank gold sales have slowed to a crawl.

Last year, central bank gold sales under the CBGA totaled just 357 tonnes, well short of the 500-tonne limit. Because as the world's second largest gold-holding central bank – Germany's Bundesbank – said in the summer, "National gold reserves have a confidence and stability-building function."

It's position is worth repeating as 2009 begins: "This function has become even more important given the geopolitical situation and the risks present in financial market developments."