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Gold Once Presided as the Dominant Asset in the Reserves of Central Banks

For governments, gold once presided as the dominant asset in the reserves of central banks (commonly referred to as the official sector) and against which all paper currencies were backed. However, with the suspension of the gold standard in 1932 and later dismantling of the Bretton Woods System in the early 1970s, gold’s link to the dollar and the majority of world currencies was severed and the metal’s price was allowed to float freely and be determined by the market. The metal still plays valuable roles for central banks, however, such as reserve diversification, instilling public confidence in the central bank, and economic security. It can also generate income through the lending of its bullion.

As of the end of 2007, total official sector gold holdings stood at just under 30,000 tonnes. The largest holdings are in the Western world, with the United States, Germany, France, Italy, and Switzerland making up the top five and mostly for whom gold is far larger in value than other currency reserves. Japan, China, and Taiwan come in respectively at numbers six, eight, and ten, but the value of their gold holdings is tiny compared to their other reserves.

The official sector has been a net supplier of gold to the market for nearly two decades, providing as much as 18% of total annual supply. The bulk of recent sales has come from European banks. These disposals have been conducted under the Central Bank Gold Agreement, which became effective in September 1999 and was renewed in 2004. A key reason behind these five-year agreements was to add an element of certainty to the market. Purchases by central banks have occurred in recent years, such as those by Russia and China but to date their scale remains limited.