Like Pip in Great Expectations, central banks keep inheriting unwelcome bequests. Today's "legacy assets" are toxic derivatives; a decade ago it was gold reserves. Both are proving hard to shrug off, but for very different reasons. And given these failures, it's little wonder the People's Bank of China has grown so concerned by its $1 trillion hoard of US Treasury bonds.
In the United States, the much-vaunted Public-Private Investment Program (PPIP) has failed to draw new buyers for "legacy" mortgage securities, despite offering huge leverage and despite having a hold-to-maturity value (albeit unknown). Western Europe's Central Bank Gold Agreement has also stalled in 2009, despite prices and private-investor demand both holding near record levels.
First signed ten years ago, the CBGA capped annual sales and made them plain in advance for the coming five years. This avoided a repeat of May 1999, when news of the UK's ham-fisted 400-tonne sales drove prices down to what then proved their floor. The 16 signatories have since divested one-fifth of their hoard in aggregate, but gold's weighting in their central-bank reserves has almost doubled regardless, rising as gold outperformed all other assets over the last decade.
The 2004 CBGA was signed in the April, but now the current agreement will lapse on 26th September with no renewal in sight.
Just as in the gold mining sector worldwide, the "easy metal" has gone, notably from Spain, the UK and excess Swiss holdings. The two largest holders, Germany and Italy, look sure to face down political calls for "mobilization", refusing to yield despite signing in both 1999 and 2004. That leaves only the IMF's 400-tonne sale, presently awaiting a rubber stamp. It can't on its own justify a 500-tonne annual limit for the coming five years.
For open-market investors, meanwhile, the barbarous relic remains singularly useful as a store of value, rising three times over against the central-bank currencies held in its place since the CBGA was signed 10 years ago. Lenin once said the victory of socialism would see central-bank gold cast into public lavatories, which at least affirms a physical use.
One wonders what final use might await today's central-bank legacies of toxic derivatives and paper dollars.
Adrian's Previous Blogs:
The decade of gold
Greed Down, Fear Up
Investors vs. Consumers, 2009
Something Odd Stirs in Mayfair