An inside story on the central bank gold agreement

The annual Davos conference organised by the World Economic Forum, which sells itself as ‘the international organisation for public-private cooperation’, is a binge for the super-elite. It includes politicians, as well as opinion leaders in culture and many fields other than money and finance. It is used by the top financiers and policy-makers more as a way of disseminating their policies rather than to test ideas against peers during the period of policy formulation. The below is an example, however, of how the trade in influence can work.

When I was an adviser to the World Gold Council, I organised a ‘secret’ meeting at Davos. It was between heads of major gold-mining companies and presidents/governors of major central banks. This was when central banks were selling gold on the market, depressing its price. Commentators were urging them on, saying gold was an outdated reserve asset and would continue to fall in value against the US dollar.

This fall in the gold price was damaging gold-producing economies around the world.

Thabo Mbeki, then deputy president of South Africa and designated successor to Nelson Mandela, chaired the meeting. It was an invitation no central banker could decline, however much they wanted to. So people such as Wim Duisenberg, who had just been appointed to be the first head of the European Central Bank, came along. There were only about 12 around the table. Mbeki introduced the meeting by laying out exactly the damage the falling gold price was doing to South Africa at the worst possible time only a few years after the end of apartheid. The central bankers had no answer. I recall that Duisenberg hung his head so low, I thought he would disappear under the table – obviously wishing he was not there at all.  

Yet it worked.  

On September 25, 1999, Duisenberg himself walked into the press room at the International Monetary Fund annual meeting in Washington, DC, and read out the first central bank gold agreement, where they promised not to sell more than a certain pre-defined amount of gold over a certain time period, saying it was influenced by industry concerns.

This is how Alex Brummer reported the decision in The Guardian: “In announcing the decision, the president of the European Central Bank, Wim Duisenberg, said the central banks were responding to the pleas of the World Gold Council, South African mining groups and the cause of stability.”

To give the pact currency, I dubbed it the ‘Washington Agreement on Gold’. The term caught on, as I intended. Central bankers hated it, as it seemed to give it an official status and the term ‘Washington’ grated (the Fed was definitely not a party to it). They also wanted to keep it discreet.

But the pact transformed the gold market, which never looked back.

This is because it gave the gold market the certainty it needed about the future actions of central banks. The gold price soared from $290 an ounce to $1,000 an ounce over the following 10 years. This raised the wealth of holders of gold throughout the world more than threefold, and is an example of trading in influence that I had a part in. Shame I did not buy any gold at the time!

This article is based on an extract from Robert Pringle’s forthcoming book, “The Power of Finance; how Ideas about Money Shaped the Modern World” (Palgrave Macmillan, Forthcoming).