The latest edition of LBMA’S Alchemist has been out for some time and it unpacks a lot about what is going on in the gold industry. However, the main focus of this edition is the role of central banks in the gold industry. The first article discusses the Banque de France, its past role in the gold market and the future.
The Banquet de France has had a major role in the past when it comes to the gold market. In the 19th century France was at the centre of the gold market. Since its creation in 1800 the central bank of France has held the largest gold reserve in the world.
Even though today France is a member of the European union and has swapped its francs for the Euro, the Banquet de France holds more than 60% of its reserves in physical gold. That translates to about 2,436 tons of pure gold bullion. This places it behind the US, Germany and Italy. 2,436 tons of bullion are valued at $96 billion which is about 4% of France’s GDP. Clearly the French value gold so much so that they store it in an underground vault called the Souterraine. The value is situated 29 meters below the River Seine.
There is another insightful article in the Alchemist that goes into detail about some lesser known central bank gold operations and periods in the history of the gold market. One such period is the Brown Bottom. This happened when the UK auctioned half of its gold reserves. This caused the price of gold to drop quite significantly. This seemingly wholesale auctioning of gold exacerbated the fears that some big gold investors and holders of gold like the European Central Banks had. People also believed that the introduction of the euro would collapse the gold market and bring prices down. To ally those fears and to protect gold the Central Bank Gold Agreement was signed on the 26th September 1999 in Washington DC. It limited the official sale of gold and reduced the level of uncertainty in the gold market. This also sets the psychological stage for the gold bullion market that followed. Gold is a useful asset to central banks even if there is no dividend or high returns.
When it comes to gold, it is important to understand the recession, interest rates and inflation figures. According to economic analysts, the US GDP growth is likely to slow down to 2.6% in 2018 from its previous growth on 2.9%. It is unlikely that we will see a recession in the US in 2019, inflation is expected to stay pretty much close to the Fed’s target, but gold prices aren’t expected to rally as significantly. Gold butis expected to trade towards the $1,300 per ounce mark.
The reason for this bullish forecast for gold is that the US Fed need to hike its rates, but the US Central bank isn’t keen on tightening its monetary policy. Other supportive factors include trade wars and possible geopolitical risks. These might bring some short-term gains. However, these aren’t sure-fire reasons to trigger a rush for gold. Investors who are interested in gold should keep abreast of all the factors that influence the gold market.
Source:
- http://www.lbma.org.uk/assets/Alchemist/Alchemist_91/Alch91Goulard.pdf&ved=2ahUKEwjolfG1ranhAhWL4IUKHaq5De8QFjABegQIERAE&usg=AOvVaw2a4zG0jtn6ibm8XnI167F2
- https://www2.deloitte.com/insights/us/en/economy/spotlight/economics-insights-analysis-10-2018.html