Germany's Bundesbank said on Tuesday it plans to keep hold of its massive gold reserves again this year, selling only enough to mint new coins.
The Bundesbank's tight grasp on its gold hoard, the second largest in the world, contrasts with sales plans flagged by other eurozone central banks, some of which actively manage their reserves to win healthy returns.
Despite the end 35 years ago of the Bretton Woods system, where currencies were pegged indirectly to gold via US dollar, the precious metal remains an important part of central bank reserves for many countries.
The advantages of gold holdings, according to the World Gold Council, are that it is easy to sell if needed, inspires public confidence in the currency and keeps its purchasing power.
The World Gold Council calculates world gold holdings by central banks are just under 31,000 tonnes, little changed from the level recorded in the late 1940s when this post-war gold standard began.
The world's biggest gold hoarder, the United States Federal Reserve, is sitting on more than 8,100 tonnes of gold, followed by the Bundesbank on 3,400 tonnes. At current prices, a tonne of gold is worth nearly $18 million.
"It's important for me to stress that for the Bundesbank, gold is a vital part of our currency reserves, which meets our demands for security and diversification of our portfolio," bank President Axel Weber said on Tuesday, adding that the Bundesbank does not aim to turn a profit.
University of Basel professor Peter Bernholz said there was no general rule for the right level of gold for a central bank. But the mix of reserve assets depended on how highly a central bank rated the principles of safety and of achieving good returns, and the economic and political environment.
"You could take the position that with a floating exchange rate you don't need any reserves at all," he said. "But safety, from a long-term perspective, is only given by gold because foreign exchange holdings are just claims on foreign governments, which can be revoked."
The share of gold in central bank reserves ranges from the United States' 67.5 percent to less than 1 percent in places like Canada and Hong Kong. The average is about 9.2 percent.
Euro zone banks, including the European Central Bank, have in total 47.7 percent of their reserve assets in gold for a total of 12,000 tonnes - more than the United States gold holdings.
The Bundesbank, with 56 percent of its assets in gold, has been particularly reluctant to sell because most profits would flow to the federal governments to help fix the budget deficit.
However, other eurozone members have no problem with gold sales going to repay debt. In recent years France, the Netherlands and Austria have managed to sell reserves without fanfare or much discussion over how to spend the proceeds.
European central banks agreed in September 2004 to limit gold sales over a five-year period to 2,500 tonnes, or 500 tonnes a year. Analysts say the first year's quota was almost fully met and 143 tonnes have been sold so far in the second.
Austria, which has halved its gold holdings since the start of the 1990s, plans to sell 90 more tonnes by 2009 under the terms of this agreement, reducing the share of gold in its reserves to about 30 percent.
"This level might then be the right one," said Rudolf Trink, head of Treasury operations at the Austrian central bank.
Austria has more than half of its gold in gold lending operations, producing what Trink described as satisfactory returns. He said central banks were now paying more attention to yield, although it was not the primary aim. "If it's possible while still observing the goal of stability, a central bank should manage what is entrusted to it for optimal results," he said.
France, which has flagged the biggest sale programme under the central bank gold agreement, also has a more active, return-oriented approach to its reserves.
The Bank of France plans to sell 500-600 tonnes of gold between 2004 and 2009 and use the proceeds to increase foreign exchange holdings, particularly in higher-yielding currencies.
The central bank expects this will produce at least 200 million euros in annual returns, which go to the government.
"Gold sales by the Banque de France meet an investment strategy objective which aims at having a more balanced currency composition of our foreign exchange reserves but which does not alter our general philosophy about gold," a Bank of France spokesperson said.
"Gold is still the only asset without credit risk and the ultimate liquidity in case of extreme crisis. It remains a very important monetary asset."
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