Central Banks and the Gold Market- Will They Get It Right This Time?

In 1999, the United Kingdom under the Chancellor of the Exchequer at the time Gordon Brown began a program of selling the nation’s gold. In seventeen auctions between 1999 and 2002, the country sold a total of 395 tons of the yellow metal. The selling pushed the price of gold below $300 per ounce.

Source: CQG

As the quarterly chart highlights, gold dropped to a bottom at $252.50 per ounce during the second half of 1999 and remained below the $300 level until 2002 when the sale was complete. Today, the UK holds gold reserves that are less than the amount of the metal they sold at prices which turned out to the lows.

The Bank of England’s timing and execution of their selling program was an embarrassment, in hindsight. At the time of the sale, many people considered gold a barbarous relic of the past. Meanwhile, many market participants still refer to the lowest price for gold since the 1970s as the “Brown Bottom” in honor of the Chancellor who later became the Prime Minister of the UK.

Gold never returned to the price that the UK received for half of their national treasure. The price has not traded below $400 since 2004, $500 since 2005, $700 since 2008, or under $1000 per ounce since 2009. London is the international hub of the gold market. There is plenty of gold at the Bank of England as the central bank is a primary holder of the metal for nations around the globe. According to their website, they hold around 400,000 bars of gold amounting to approximately 5,000 tons of the metal. Unfortunately for the citizens of the UK, the nation owns less than 10 percent of those holdings.

Over recent years, central banks have been net buyers of gold to increase their reserves. The leading buyers have been China and Russia; both countries are significant producers of the metal and their holdings of the precious metal are low as a percentage of their total currency reserves. The Chinese and Russians are using their domestic production to increase their holdings. At the same time, both have shown up in the international bullion market as buyers of metal available for sale.

The current trend in the gold market is higher since mid-August. Nearby COMEX gold futures fell a price that was just above the $1160 level from a double top formation in January and April 2018 at $1365.40. The rising value of the US dollar weighed on the price of gold and sent it to the low last summer. However, in a sign of strength for the gold market, while the dollar remained near the highs, and rose to even higher levels since August 2018, gold has been making higher lows and higher highs.

Source: CQG

As the weekly chart illustrates, the price of the yellow metal recently peaked at over $1325 per ounce and was above the $1310 level on February 8. The trend in gold is currently higher.

The Bank of England sold the low in the gold market. At over $1300 per ounce, China and Russia are paying around five times the amount the UK received in parting with their reserves. History will report that the British sold the lows in gold. With almost two decades of data, their opportunity loss is legendary. Time will tell if the Chinese and Russians are paying too high of a price for the yellow metal.

The value of fiat money declined after a decade of central bank policies that added liquidity to economies following the 2008 global financial crisis. Historically low short-term interest rates and quantitative easing programs have amounted to printing currency to stimulate the economies around the world. Currencies like the US dollar and euro have the backing of the full faith and credit of the governments that print the legal tender notes. Gold is gold, and it has been around for thousands of years as a store of value and means of exchange. History will tell us if the current buyers of gold are making the same boneheaded move that the Bank of England made at the turn of this century. In the years to come, I bet that history still calls the 1999 low in gold the “Brown Bottom” and views China and Russia as shrewd buyers.