Why does the Netherlands have over 35 billion euros worth of gold?

Current issues related to economy, (responsible) investment, pension and income: every week an expert at APG gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on why De Nederlandsche Bank keeps more than 35 billion euros’ worth of gold in storage.

Since 1968, part of the Dutch gold stock was stored under the headquarters of De Nederlandsche Bank (DNB) in Amsterdam. In recent weeks, the fourteen thousand gold bars and one thousand cases of gold coins were moved, from their temporary storage in Haarlem to the so-called DNB Cash Center on a heavily secured defense site near Zeist. Thirty-one percent of the total Dutch gold supply of 612 tons is now stored there. An equal percentage is in New York, while 20 percent is kept in Canada’s capital Ottawa and 18 percent in London. Why does the Netherlands have this stockpile, which has a current value of over 35 billion euros?

Gold standard

In 1936, the Netherlands was one of the last European countries to go off the gold standard. From that moment on, you could no longer exchange your guilders for gold. Nobody did that anyway because paying in gold is inconvenient. But the fact that the possibility existed created confidence in the stability of the currency, Knaap explains.  “However, it is very bad for monetary policy, because tying a currency to the gold standard means you can’t create additional money unless you buy additional gold. And the amount of money available is an important variable in an economy. In the late 19th, early 20th century, the economy was growing fast, and that is when you want to be able to print extra money, but you couldn’t do that. Dropping the price level, the only other solution, caused economic stagnation. Sticking to the gold standard was thus one of the causes of the Great Depression of the 1930s.”

It led to more and more central banks abandoning the gold standard, after which the “fiat system” was born. In this system, money has no intrinsic value. It is created only by the fiat of the government issuing the currency. “As a legacy of the gold standard, the central banks were still left with a large amount of gold they did not know what to do with. The Netherlands therefore sold a large portion in the 1990s: some 30 years ago we still had 1,700 tons of gold, now ‘only’ just over 600.” In retrospect, some of that gold was sold at a rock-bottom price. “Perhaps there is some regret about that and no government wants to risk making that mistake again.”

Trust anchor

DNB’s website also states that gold serves as a reserve and trust anchor. Knaap: "So it has almost a symbolic value. That, plus the fact that DNB has just started using a new storage facility, does suggest that the rest of the stock will not be sold any time soon. In principle, a central bank can just issue (paper) money, they don’t need gold for that anymore. But central banks usually have all kinds of assets, and gold is part of that, just as foreign currency is. So, in addition to gold, DNB also owns dollars, yen and pounds.”

The fact that gold always retains a certain value means it can serve as a trust anchor. In addition, it also constitutes an investment - or in other words - a reserve. “As an investment, gold is not very attractive at all: after all, it doesn’t yield dividends or interest, and you just have to hope that it becomes worth more. Other than that, it doesn’t do anything. Although thinking about gold has shifted somewhat and many investors now see gold as a hedge against very bad times after all. When stocks and bonds do badly, for example, the price of gold often goes up. That is also exactly what happened during the 2008 financial crisis and the Covid crisis. So, if you have an investment portfolio that includes gold, it provides stability. Something like this applies to an amplified degree to central banks, which need their reserves precisely in difficult times.”

Sanctions

Gold does make up an increasingly smaller portion of countries’ total reserves. Whereas the reserves of developed economies in 1950 consisted of an average of 80 percent gold, today the average is 17 percent. For emerging economies, the percentage dropped from 30 to 7 percent. At 56 percent, the Netherlands is close to the Eurozone average of 53 percent. Our country has been among the top sellers of gold since 1999, along with France, Switzerland and the United Kingdom.

The biggest buyers were Russia, China, Turkey and India. “The IMF investigated why precisely those countries bought a lot of gold. Besides low interest rates - which made U.S. bonds less attractive - and the argument of gold as a safe haven, a third factor came into play: the fear of sanctions. If you hold your reserves primarily in dollars, you are dependent on the U.S. for access to that money. That makes it attractive for those countries to build up gold reserves, despite the disadvantages of doing so: you have to guard it, you can’t spend it immediately and you can’t just move it.” Those disadvantages also apply to the Dutch gold supply, of course, but still outweigh the advantages of gold as a trust anchor and reserve.