"Many central banks that own gold have been living in a fantasyland since 1971, when the United States defaulted on its promises to back the US dollar with gold. At the time, gold was around $42 per ounce, and central banks had gold listed on their books at that price. As gold exploded throughout the 1970s in response to massive currency inflation in the US economy, central banks still thought of gold as being worth $42 per ounce, regardless of the price at which it was trading in global markets.
By the early 1990s, the socialist welfare states of the western world began to get into trouble. Governments had printed vast amounts of paper fiat currency, backed by nothing, and the ever-present fear grew stronger that all this new money created out of thin air would begin chasing goods and services, creating tremendous inflation problems. Central banks, the ones printing all this new money the politicians constantly demanded, begin to fear that the most sensitive barometer to inflation in world history, the price of gold, would begin to rise and expose the inherent instability of rapidly growing fiat currencies proliferating to finance cradle to grave socialism.
The central banks began to loan out their gold to large money center bullion banks. The central banks knew the bullion banks would immediately sell the gold in the open market and use the proceeds to invest elsewhere. This strategy had a number of benefits for the central banks. First, by slowly dumping their citizens' gold on the global markets, constant oversupply pressure could be placed on the yellow metal, driving down its price over time and short-circuiting the inflation warning siren provided by gold."
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