Economic Conditions: Gold and Interbank Forex

Current economic conditions in both the US and Europe have caused a slowdown in the sale of gold by banks. Sales of gold by European banks are expected to be lower this year since banks are trying to mitigate the risks of paper assets. Banks in Asia and the Middle East are expected to become buyers of gold to diversify away from the US dollar. The main reason cited for central banks holding gold is the instability of the US dollar.

Although the dollar has rallied against the Euro recently European banks are uneasy about the long term stability of the Dollar. The European Central Bank Gold agreement allows the sale of 500 tons a year but sales have fallen short of the ceiling placed on gold sales and current sales amount to 357 tons. Said metals consultant Philip Klapwijk, "Given the damage done to a lot of other paper assets that were formerly considered secure, there will be greater risk aversion among central banks." This will only boost gold's status within central bank reserves. Bundesbank, with the second largest gold reserves in the world after the U.S. Federal Reserve, announced that it would sell no gold during the next 12 months. After announcing the sale of 250 tons of gold the Swiss National Bank announced it had no plans to sell more gold.

Earlier in the year the Dollar slipped to record lows against the Euro and many European central banks are expressing doubts over the long term future of the dollar. Again Mr. Klapwijk states, "There are more and more questions being placed against the U.S. dollar and its role at centre of existing international financial system." Since World War Two the US dollar has been the standard against which all other currencies are measured. The current crisis in the US has many questioning the wisdom of pegging currencies against the dollar.

Demand for gold is predicted to increase with corresponding rises in price. Financial concerns are making gold more attractive as a reserve asset for central banks. Gold is seen as a confidence building and stabilizing influence on a country's currency. While gold prices are not expected to skyrocket as in the past, increased demand is expected to increase prices.

What effect this will have on the interbank Forex markets is open to wide speculation. Markets, including the Interbank Forex, are taking a wait and see approach due to the US financial crisis and concerns about the proposed bailout. The US bailout bill passed overwhelmingly in the US Senate and a vote is expected in the House of Representatives by Friday. Until then markets will probably remain in a state of limbo.