Central Bank Gold Agreement

The Central Bank Gold Agreement (CBGA), called also the Washington Agreement on Gold, is an accord regulating official gold sales. The original version of the agreement was signed on September 26, 1999 in Washington, D.C. Under the agreement, the European Central Bank, the Swiss National Bank and 13 other European national central banks committed to limit sales to 2,000 tons over five years (400 tons per year).

The first CBGA was very bullish for the price of gold, as it removed a lot of uncertainty from the gold market and set the psychological stage for the next gold bull market. The price of gold jumped 13.7 percent over the three trading days after the announcement of the agreement. The announcement of the Central Bank Gold Agreement also affected the gold lending market. Gold lease rates skyrocketed due to fears of diminished liquidity in the gold lending market. In consequence, the gold forward offered rates dived deeply into negative territory, indicating backwardation in gold (which is the opposite of contango in gold).

The agreement was extended for another five years in 2004. The list of signatories was almost unchanged: the Bank of England withdrew its support, while the Bank of Greece joined the club. The quota of annual sales was increased to 500 tons, as the previous level was slightly exceeded.

In 2009, the agreement was renewed again between 19 central banks (the previous list of signatories was extended by the central banks of Cyprus, Malta, Slovakia and Slovenia) for another five years, this time with the quota once more set at 400 tons per year (the burst of the financial crisis of 2007-2008 reduced the propensity to sell gold).

The last extension of the agreement came in 2014. The fourth Central Bank Gold Agreement differs from its predecessors, as it does not set any limits on gold sales. Instead, signatories (expanded by central banks of Estonia and Lithuania) agreed to “coordinate their gold transactions so as to avoid market disturbances”. They also noted that “currently, they do not have any plans to sell significant amounts of gold”. As always, the central banks pointed out that “gold remains an important element of global monetary reserve” and that the agreement “will be reviewed after five years”. Although the removal of the quantitative ceiling for annual gold sales may look disturbing, it means that official gold sales are generally complete. Indeed, the central banks had problems to reach the limits and sales practically stopped in 2010-2011.