Central banks stockpiling bullion? Based on their historically really bad timing, looks like the price of gold has more room to move……DOWN!

“The Central Bank Gold Agreement (also known as the Washington Agreement on Gold) was announced on September 26, 1999. It followed a period of increasing concern that uncoordinated central bank gold sales were destabilising the market, driving the gold price sharply down. “ Source: World Gold Council.

According to reports, net purchases of gold by central banks exploded during the third quarter of 2011, adding to stockpiles at a record pace. As you can see from the accompanying graph, Central banks have a tendency to sell gold in droves when the price is down – not much different that a retail investor. The first Central Bank Gold Agreement (CBGA1) in 1999 was designed to mitigate the downward pressure of these sales on the gold market. They held 25% (roughly) of all the gold that wasn’t still in the ground, and the price of gold looked to be heading to $200 an ounce or less.

Since the central banks have been net sellers for the past 20 years, the enthusiam to buy at these lofty prices is kind of ominous. Many will argue that it’s simply China, India and South America who (as I suggested would happen in my 2004 book Resources Rock) are adding to skinny reserves in order to diversify their holdings, but that doesn’t explain away the poor timing. Imagine if they’d bought the precious yellow stuff instead of selling when they did? Even the world’s most powerful financial leaders buy high and sell low.

Cynics will make the case that their actions evidence a bearish attitude to currencies – more or less a consensus opinion. I’d argue that if the Euro dies away (since it is not a lender of last resort, the ECB is pretty much useless) then remaining currencies will be increasingly valuable. After all, you need currency to pay back debt. Paper money will be in short supply and perhaps even more precious than gold.