Why are European countries moving their gold out of North America?

Why are European countries moving their gold out of North America?

When the central bank of the Netherlands said this week that it had shifted tonnes of the country’s gold out of North America, it explained that the move would leave it “better prepared for severe crises”.

A total of 86 tonnes out of roughly 313 tonnes held in the US and Canada were moved to London “in view of increasing geopolitical unrest”, the bank said, so the gold could be “readily available for use in a crisis situation”.

That naturally raised questions. Why were the Dutch doing this? Were they bracing for a major economic shock?

Apparently not, but the decision was clearly shaped by the unstable and uncertain world countries now face, with trade and military conflicts pushing them to take precautions and keep more of their gold closer to home.

Earlier this year, France said it had brought its gold reserves back from the US. Germany’s Bundesbank also moved more than 216 tonnes of gold from overseas storage sites — 111 tonnes from New York and 105 tonnes from Paris — over several years ending in 2016.

This is a tactic that has been used before during periods of global instability. “Some European central banks moved part of their gold holdings to New York during the Cold War,” said research analysts Lina Thomas and Daan Struyven of Goldman Sachs.

Joseph Cavatoni, senior market strategist at the World Gold Council, told the BBC that while wars and trade tensions were “playing into some of these decisions”, they did not “top the list” of reasons.

Inflation, interest rates and the practical benefit of keeping gold somewhere it can be traded quickly also mattered.

“I don’t get a sense that there’s an impending doom,” Cavatoni said, “but what I do think is people are being better educated around how to manage their reserve assets, growing their reserve assets, and actually thinking more effectively around how to make the most of those assets.”

De Nederlandsche Bank said the gold taken from the US and Canada between March and August this year was now stored in the vaults of the Bank of England.

“We expect that we will never need to use them, but we do need to strengthen our resilience and preparedness,” said Olaf Sleijpen, governor of the Dutch central bank.

London was viewed as the best option because of its role as a major global trading centre. If gold needs to be bought or sold quickly in a crisis, London is the place to do it, which is why the Bank of England is such a popular storage location.

The Bank is among the world’s biggest custodians of gold. Beneath the 300-year-old institution in central London are about 400,000 bars worth more than £200bn.

Industry surveys by the World Gold Council show that the Bank of England remains the most popular vaulting location, although central banks are increasingly spreading their holdings across different places.

Where to keep a country’s gold is “increasingly top of mind for reserve managers”, according to Thomas and Struyven of Goldman Sachs.

In the modern era, there are several ways to move gold around. The Dutch sold about 59 tonnes in New York and then bought more holdings in London, meaning that amount did not have to be physically shipped across the Atlantic.

But more than 27 tonnes were “physically transferred” from the US and Canada to the Dutch town of Zeist. A similar amount was also sent from Zeist to London.

Companies that carry out these operations are secretive about how they do it, but the security and planning involved are extensive, to avoid anything resembling a real-life Italian Job.

Cavatoni of the World Gold Council said one common way to move gold holdings is to sell the metal in one place and buy it in another. “Let’s say I want my gold in New York and I have it in London. I could sell it in London, buy it in New York, same day, same time, effectively book transfer without actually having to put it on any other logistical change.”

Only a handful of companies handle cross-border gold shipments, including Brink’s Global Services, which told the BBC it had seen “increased demand” recently from central banks.

“Heightened geopolitical and economic uncertainty, along with gold’s growing role as a strategic reserve asset, appear to be contributing to this trend,” said Nader Antar, Brink’s executive vice president.

Gold storage has become a major issue for central banks because they have been buying more of it. But keeping it domestically is expensive, Thomas and Struyven of Goldman Sachs said.

“Domestic storage requires investment in physical security, audit infrastructure, and insurance; costs that can be disproportionate for smaller central banks,” they said.

Over the past four years, central banks have bought an annual average of 1,000 tonnes of gold, well above the 500-tonne average in the previous decade, according to the World Gold Council.

The trend dates back to the global financial crisis, and it is expected to rise further in the coming year.

Gold has been enjoying a strong run in recent years. Its price has climbed to a series of record highs, passing $5,000 an ounce in January.

There are several reasons for the rise, but a major one is the metal’s place in the human mind as a so-called safe haven asset, used for investment during periods of financial and geopolitical turmoil caused by trade and military wars.

Inflation and interest rates also affect gold’s appeal. Because the commodity is scarce and has been valued for thousands of years, it is relatively resistant to rising prices and is therefore seen as a solid investment.

“Over the past half-century, gold prices have risen much faster than the Consumer Price Index (CPI) - the most closely watched measure of inflation,” according to investment bank Charles Schwab.

Although gold has fallen from the record high reached earlier this year, it remains historically elevated.

Researchers at Goldman forecast that the price will reach $4,900 (£3,624) per troy ounce by the end of 2026, $300 higher than it was in August.

Thomas and Struyven said central bank demand for gold is one of the main reasons prices are climbing.