Introduction to Gold Prices
Gold prices have increased by roughly 25 percent this year alone. According to the European Central Bank, gold has surpassed the euro as the second-largest reserve asset. Emerging market authorities, particularly China, are now major purchasers of gold, driven by concerns over US financial sanctions, geopolitical tensions, and the unpredictability of President Donald Trump’s tariffs.
Central Banks and Gold Reserves
The Global Public Investor 2025 survey, conducted by the Official Monetary and Financial Institutions Forum (OMFIF), found that gold is the most demanded asset class by central banks. A third of the surveyed reserve managers expect to increase their gold holdings in the short term. Similarly, the World Gold Council’s survey of central banks revealed that 95 percent of respondents believe central bank gold reserves will rise in the next 12 months.
The Role of Gold in the International Monetary System
However, the question remains as to why nations continue to hold their gold stocks. Gold no longer plays an official role in the international monetary system, generates no interest, is costly to store, and is less liquid and harder to sell than securities. Even if holding gold stocks results in an appreciation for the national balance sheet, it generates no flow of resources to officialdom.
The Benefits of Selling Gold Stocks
Monetizing gold stocks could generate resources for good use. For example, US debt held by the public is now roughly $30 trillion. US gold sales over time, using current market prices, could generate over $850 billion for the US Treasury. Reducing debt by such an amount could lessen pressures on interest rates, especially at a time of unsustainable fiscal deficits. Similar arguments could be made for France and Italy, where gold sales could reduce their governments’ fiscal debt by more than 5 percent.
Responsible Gold Sales
However, gold stocks would need to be sold responsibly by official authorities. An uncoordinated rush to sell gold would send prices spiraling downwards. In 1999, European central banks signed the Washington Agreement on Gold, setting annual limits on official gold sales to avoid disrupting markets. When the International Monetary Fund sold limited quantities of gold after the 2008 financial crisis, efforts were made to contain market disruption. Such constraints provide important precedents for official gold sales.
Challenges to Gold Sales
Notwithstanding the rationale for official gold sales, they are unlikely to occur due to a clash with realpolitik. There are many "gold bugs" who believe gold could anchor a futuristic monetary order or that a commodity-based international monetary system could better discipline inflation. Gold-producing firms would lobby strenuously against any significant official gold sales. Some gold-producing developing countries might object, and nations facing massive debts or financing needs would be well advised to consider responsibly selling their gold holdings.
Conclusion
In conclusion, while gold prices may be surging now due to central bank diversification, this trend is primarily because massive official stocks are being held off the market. If authorities were to responsibly sell gold stocks, it might quickly become evident that frothy headlines about gold and official reserve diversification were built on sand. Nations would be wise to consider the benefits of selling their gold holdings, which could generate significant resources to reduce debt and alleviate financing pressures. Ultimately, responsible gold sales could be a prudent step towards a more stable and sustainable economic future. The writer is US chair of the Official Monetary and Financial Institutions Forum.
