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Central banks favor gold as crisis unfolds

Jan Harvey
Reuters [1]
Thursday, October2, 2008

LONDON (Reuters) – Sales of gold by European central banks are likely to be lower than expected over the next year as the global banking crisis boosts bullion’s appeal as a “safe” reserve asset.

And banks elsewhere in the world, most notably in Asia and the Middle East, may even become buyers of gold in an attempt to diversify their reserves away from the dollar, analysts say.

Under the terms of the Central Bank Gold Agreement, signed in 1999 by key European institutions including Germany’s Bundesbank and the European Central Bank and renewed in 2004, members can sell up to 500 tonnes of gold a year.

But in the fourth year of the latest agreement, which ended on Friday, sales fell well short of this ceiling, to just over 357 tonnes.


With banks worried by the outlook for the financial sector, sales could be even lower in the final year of the pact.

“Given the damage done to a lot of other paper assets that were formerly considered secure, there will be greater risk aversion among central banks,” said Philip Klapwijk, executive chairman of metals consultancy GFMS. “This will only boost gold’s status within central bank reserves.”

A key reason why central banks want to hold onto gold is the instability of their most common reserve asset, the dollar.

The U.S. currency slipped to record lows against the euro earlier this year, and although it has since taken on a firmer tone, doubts remain over its outlook.

“Gold assets have moved up in value in euro terms whereas dollar assets have fallen considerably,” Klapwijk said. “There has been a reassessment of gold given developments in last few years.”

“There are more and more questions being placed against the U.S. dollar and its role at center of existing international financial system,” he added.

Aside from the pressures associated with the current financial crisis, with a number of European central banks now having completed previously announced sales programs, analysts say a dip in selling is to be expected.