Collectively, the central bank sector claims to hold the world’s largest
above ground gold bar stockpile, some 33,800 tonnes of gold bars.
Individually within this group, some central banks claim to be the top
holders of gold bullion in the world, with individual holdings in the
thousands of tonnes range.
This worldwide central bank group, also known as the official sector,
spans central banks (such as the Deutsche Bundesbank), international monetary
institutions (such as the Bank for international Settlements) and national
monetary authorities (such as the Saudi Arabian Monetary Authority – SAMA).
These institutions hold gold as one of their reserve assets. Any
gold held by a central bank as a reserve asset is classified as monetary
gold. In addition to monetary gold, central bank reserve assets include such
things as foreign exchange assets (such as US Dollars) and IMF Special
Drawing Rights (SDRs). In general, reserve assets held by central banks are
managed according to the criteria of safety, liquidity and return.
Note that most of these central banks don’t own the gold they hold, but
merely hold it on behalf of their nation states. See “Who
Owns the World’s Largest Gold Hoards? – Not the Central Banks!” on the
BullionStar website for a discussion of official gold reserves ownership.
Given that central banks don’t generally divulge the gold that they lend,
swap or otherwise use as collateral, the question as to whether the official
sector actually holds 33,800 of gold, or far less than that amount, is
debatable. But for the purposes of this discussion, the amount of gold that
the central banking sector holds is not important.
This discussion focuses on why central banks hold gold. This
discussion also uniquely draws on actual responses from many of the world’s
largest central banks as to why, in their own words, they hold gold. While
the common reasons for central banks holding gold range from store of value,
to financial insurance, to asset diversification, we thought its best to let
the actual gold holding central banks state their case.
Taking the list of official
sector gold holders compiled by the World Gold Council (which uses IMF
data sourced from the individual banks), the Top 40 gold holders on this list
were identified. While most of the Top 40 gold holders are national
central banks or equivalent, there are also a small number of international
monetary institutions in the Top 40, namely, the Bank for International
Settlements (BIS), the European Central Bank (ECB), and the International
Monetary Fund (IMF). A similar question was sent out to each bank and
institution. The question was:
“in the context that central banks hold gold as a reserve asset on
their balance sheets, can Central Bank X clarify the main reasons why it
continues to hold gold as a reserve asset?”
The central banks which responded to this question with constructive or
definitive answers were as follows:
Germany
Germany’s Deutsche
Bundesbank, which is most famous recently for repatriating gold from New
York and Paris, but which still stores gold in London and New York, placed a
particular emphasis on gold’s high liquidity, as well as gold’s powerful role
in financial crises and emergencies:
“The part of the Bundesbank’s gold reserves which is to remain abroad
could, in particular, be activated in an emergency. Therefore one part will
remain in New York following completion of the relocation – the United States
has the most important reserve currency in the world – and one part in
London, the world’s largest trading centre for gold.
In the event of a crisis, the gold could be pledged as collateral or
sold at the storage site abroad, without having to be transported. In this
way, the Bundesbank could raise liquidity in a foreign reserve currency.
However, these are purely precautionary measures as we are not expecting this
kind of contingency scenario at the current time.
Gold is a type of emergency reserve which can also be used in crisis
situations when currencies come under pressure.”
Austria
In neighbouring Austria, the Oesterreichische
Nationalbank (OeNB), Austria’s central bank, also mentioned the
liquidity characteristics of gold, its benefits in a crisis, and also gold’s
diversification benefits. The OeNB also recently made headlines when it too
repatriated some of its gold back from storage in London. The OeNB told
BullionStar that:
“Gold is an essential part within our strategy for crisis
prevention and crisis handling and is held as liquidity reserve but is also a
means to diversity our investments.”
Switzerland
Staying in the region, Switzerland’s central bank, the Swiss National Bank (SNB) highlighted the
diversification and risk optimisation benefits of gold, responding that the
National Bank holds gold because:
“As part of a good diversification of currency reserves, a certain
proportion of gold can help reduce the balance sheet risk. The Swiss Federal
Constitution, art.
99 stipulates that the SNB has to hold a part of its currency
reserves in gold.
See also the speech
given by Fritz Zurbrügg, Vice Chairman of the Governing Board of the SNB;
it contains comments on the role of gold in the SNB’s currency
reserves: .”
Article 99 of the Swiss Constitution in part says that “the Swiss
National Bank shall create sufficient monetary reserves from its profits; a
part of these reserves shall be held in gold“.
Fritz Zurbrügg’s speech cited by the SNB, which was mostly a
politically loaded SNB attack against the 2014 Swiss gold referendum more
than anything else, says in part that gold reserves can be used in
crisis management and that the SNB’s gold is “stored in multiple
locations for reasons of risk diversification“.
Poland
The Polish central bank, Narodowy Bank
Polski (NBP), provided a very detailed answer to BullionStar
covering gold’s lack of credit risk and counterparty risk and its
finite supply, as well as gold’s safe haven and diversification benefits: The
NBP said that:
“Gold, due to its attributes is a quite specific asset, and
traditionally has been an important component of central bank’s foreign
reserves.
The main features which support the unprecedented role of gold at the
same time constitute the rationale for holding gold within central bank’s
reserves. These are: lack of credit risk, independence from any country’s
economic policy, limited size of the resource, physical features such as
durability and almost imperishability.
Additionally, gold has been constantly perceived as a safe haven
asset, and is particularly desirable in crisis times, when gold prices
increase while other core assets’ prices have a downward tendency.”
Sweden
Moving north to Sweden, the Swedish
Riksbank, the world’s oldest central bank, responded to BullionStar with
an explanation that its holds gold for liquidity, foreign exchange intervention,
and diversification reasons:
“In brief, gold is a financial asset that, like the currency reserve,
aims to ensure that the Riksbank can carry out its tasks. The gold can, for
example, be used to fund liquidity support or foreign exchange interventions.
The main reason why Sweden still has a gold reserve is because the
value of gold does not normally follow the same pattern as the value of the
currency reserve. Consequently, the combined value of the gold and currency
reserve is more stable than the value of the gold reserve and the currency
reserve separately.”
Greece
Elsewhere in Europe, the Bank of Greece,
Greece’s central bank, told BullionStar that it holds gold because of its
safe haven and high liquidity characteristics during crises, crises which
notably the Bank of Greece has faced plenty of in the recent past:
“The two main reasons central banks, including the Bank of Greece
(typically prudent-oriented organisations), choose to include gold as a
reserve asset on their balance sheets, are: 1) its recognition as a safe
haven asset during periods of markets’ unrest and 2) the ability of instant
liquidation in case of emergency.”
Portugal
The Bank of Portugal, the
Portuguese central bank, kept its answer generic, and seemed to speak on
behalf of central banks in general, covering the main arguments why central
banks as a group hold gold:
“Gold reserves are kept by Central Banks mostly for safety, liquidity,
return and as a diversification strategy. Gold compares extremely favorably
to other traditional reserve assets with high-quality and liquidity helping
Central Banks to preserve capital, diversify portfolios, mitigate risks and
on the medium/long-term Gold has consistently outperformed the average
returns of other alternative financial assets.”
UK Treasury
The United Kingdom’s official gold holdings are held in the name of HM
Treasury, and not, as sometimes thought, in the name of the Bank of England.
The Bank of England is custodian of the HM Treasury gold as well as custodian
for the gold of many nations, including many of the central banks mentioned
in this article. HM Treasury told BullionStar:
“The Government’s official holdings of international reserves comprise
gold and foreign currency assets, and (IMF) Special Drawing Rights (SDRs).
HM Treasury appoints the Bank of England as its agent to carry out the
day-to-day management of the international reserves. The Bank of England’s ‘Handbook
on Foreign Exchange Reserves Management’ sets out the traditional reasons
for countries holding gold in their foreign exchange reserves.”
Looking at this Bank of England Handbook, a section titled “The Role of
Gold” sums up the UK’s traditional reasons for holding gold:
- the “war chest” argument – gold is seen as the
ultimate asset to hold in an emergency and in the past has often
appreciated in value in times of financial instability or uncertainty;
- the ultimate store of value, inflation hedge and medium
of exchanges – gold has traditionally kept its value against inflation
and has always been accepted as a medium of exchange between countries;
- no default risk – gold is “nobody’s liability” and
so cannot be frozen, repudiated or defaulted on;
- gold’s historical role in the international monetary
system as the ultimate backing for domestic paper money.
While the BoE author (John Nugée) questions if gold is suitable for the
reserve management strategies of all central banks, he concludes that:
“The traditional view of gold as the ultimate asset still
carries weight, and gold also provides an excellent diversification for
currency assets; over the very long run there is a significant negative
correlation between gold and other assets and a portfolio containing gold
will show lower volatility over several business cycles.
Moreover central banks can increasingly manage their gold holdings to
enhance returns through gold lending, gold swaps, collateralised borrowing,
and so on. “
Notably, apart from South Africa’s answer below, the Bank of England paper
is the only reference to gold lending and gold swaps in all the
correspondence and references generated by these central bank responses. But
it is not surprising that the Bank of England mentions gold lending and gold
swaps, since the Bank of England is the world’s centre for these particular
central bank activities.
Australia
Responding from Sydney, the Reserve Bank
of Australia (RBA) told BullionStar that it views gold as financial
insurance and to some extent as a form of asset diversification:
“The principal reason the Bank continues to hold some gold is as a
contingency against unforeseen events. You may be aware that in 1997 the Bank
sold 167 tonnes of gold, reducing its holdings from 247 tonnes to 80 tonnes
after it was concluded that the gold holdings provided fewer diversification
benefits than some other reserve assets.”
Romania
Romania’s central bank, the National Bank of
Romania (BNR) advised consulting its 2016 annual report:
“We suggest you to consult our website at the address http://www.bnr.ro/Regular-publications-2504.aspx, Annual
Report 2016, pages 152-153, where you may find
useful information regarding your concern.”
From this annual report, there are a number of reasons stated as to what
the National Bank of Romania holds gold as a reserve asset:
“The gold reserve is meant, inter alia, to enhance confidence in the
stability of the Romanian financial system and of the leu, being particularly
useful in times of heightened economic turmoil (domestically or abroad) or
geopolitical tensions.
Unlike other asset types, gold has no solvency risk attached, because
it is not “issued” by an authority (such as a government or a central bank).”
Philippines
Bangko Sentral ng Pilipinas, the
Central Bank of the Philippines, also highlighted the themes of gold as a
safe haven asset and as a portfolio diversifier, as well as an inflation
hedge:
“The BSP, like other central banks, holds gold as reserve asset for
the following reasons:
Diversification. By diversifying its reserve assets to include gold,
the BSP is in a better position to manage risks and promote stability since
gold is not directly influenced by economic shocks and policies. Moreover,
its supply and demand are independent from the factors affecting the value of
other reserve assets components.
Security. Gold is a real asset and bears no counterparty or credit
risk. In times of uncertainty, gold is considered a safe-haven asset.
Inflation hedge. When inflation and inflation expectations are high,
gold is considered a hedge against accelerating asset prices. Central
banks buy gold to protect their currencies’ purchasing power in the event of
an inflation.
Moreover, since the Philippines is a gold-producing nation, the BSP
can purchase gold from small-scale miners, refine and cast these into gold
bars (good delivery bars) that would qualify as reserve asset. Therefore, it
can build up its gold reserves without relying too much on external purchases
that would have to be paid for in foreign exchange.”
South Africa
The Reserve Bank of South Africa (SARB) provided what is probably the most
comprehensive answer of all the central banks polled, possibly a model text
book answer. SARB said that:
- the SARB as a central bank can be viewed as a
“traditional gold holder” which has inherited gold reserves as part of a
legacy and has over time kept its level of gold reserves unchanged to
support a broad country strategy. South Africa being one of the main
gold producers in the world, it is appropriate for the SARB to
hold part of its official reserves in gold to confirm the country’s
confidence in the metal.
More in general and similar to many other central banks, the rationale
for SARB [holding gold] remains:
- Gold acts as a store of value in times of crisis and
is therefore seen as a safe-haven for capital preservation
- Gold acts as a hedge against inflation. In other
words, the price of gold tends to increase as inflation rises
- Gold provides some diversification to official
reserves – it’s rather low correlation with government bonds and
money-market instruments
- Gold has an intrinsic value and as a result it is
nobody’s liability. As a unique asset class, it is not influenced
by a country’s economic policy and outlook
- Although short-term gold lending rates are currently
very low, this has not always been the case and these rates may increase
again, suggesting that it may not forever remain a non-income earning
asset. In addition, when investing for longer time periods, gold
loans earn positive, albeit low, returns when compared to other asset
classes
- Gold reserves can be regarded as insurance against
unlikely, but extremely damaging events, such as the collapse of
financial systems or debt default by major sovereign nations
Brazil
Banco Central do Brasil, the
Brazilian central bank, referenced reserve diversification and store of value
in its response to BullionStar:
“The asset allocation of the Brazilian foreign reserves, including
Gold, is a strategic decision of the Board of Governors. But, according to
some Central Banks best practices, Gold as a commodity may be used as storage
of value and to diversify their foreign reserves portfolio.”
Libya
While there is some skepticism as to how much gold the central bank of
Libya actually has in the aftermath of its recent invasion, the Banque du
Liban provided an interesting response on why it still holds gold, i.e. that
its prevented by law from selling its gold holdings:
“When the LBP [Libyan Pound up to 1971] was very strong versus
the USD in the early seventies ,Banque du Liban bought a large portion of its
gold reserves what was very wise as the ounce price was around 42 USD.
Then after the turmoil that plunged the country into war and chaos and
in order to preserve the reserves, the parliament issued a law preventing
Banque du Liban from trading on gold and consequently from selling the
existing reserves. The law is still in force and Banque du Liban is holding
now the 15th largest gold reserves worldwide.”
European Central Bank (ECB)
The ECB responded to BullionStar’s question without actually addressing
the question and by citing references which not not address the question
either. This deflection strategy is not unknown in ECB press conferences. The
ECB said that:
“We would like to refer you to our related press releaseECB
and other central banks announce the fourth Central Bank Gold Agreement as
well as to our web page Foreign
reserves and own funds.”
The only reference the 4th central bank gold agreement (which was between
the ECB and European central banks) makes to gold reserves is that “Gold
remains an important element of global monetary reserves“, but does not
say why. Interestingly, the ECB’s ‘Foreign Reserves and own Funds” page
states that “The ECB’s foreign reserves [which include gold] ensure that
the ECB has sufficient liquidity to conduct foreign exchange
operations if needed.”
These “foreign exchange operations” are, according to the ECB, mainly
foreign exchange interventions, which can be unilateral or concerted (ECB
member banks together), and can be centralised (directed by the ECB) or
decentralised (carried out by the member banks on behalf of the ECB). So is
ECB gold being used as liquidity in foreign exchange operations? The Swedish
Riksbank mentioned this use of gold, so it might be an operational tactic of
the ECB also.
A number of banks, although they responded, said that they could not
comment on the reasons they hold gold. This secretive approach isn’t very
logical and is even more surprising given that some of the banks which took
this approach are all so-called progressive and advanced OECD economies.
Spain
The Banco de España, which is a
member of the ECB’s Eurosystem alongside such central banks as the
Portuguese, German and Austrian central banks, seemed to be particularly
secretive as to why it holds gold, and told BullionStar:
“We do not make public comments on the reserve assets policy of the
Banco de Espana so unfortunately we cannot help you in your query.”
Singapore
Likewise, the Monetary Authority of
Singapore (MAS), which is located in walking distance of BullionStar’s
office, responded that:
“As a matter of policy, we do not comment on our reserve composition.
Hope you can understand.
Japan
Similarly, the Bank of Japan
(BoJ) took a secretive approach:
“Regarding your inquiry on our gold asset, we cannot disclose any
information other than the information published on our website due to our
confidentiality policy.”
However, looking at the Bank of Japan website, there is nothing material
on the site addressing why the BoJ continues to hold a very large amount of
gold.
Bank for International Settlements (BIS)
The BIS, headquartered in Basel, Switzerland, is commonly known as the
central bankser’s central bank. The BIS is also infamously known for
organising and plotting gold
price suppression and gold market interventions through its various Gold
Pool cartels. As well as holding gold in its own name, the BIS holds gold on
behalf of other central banks. Perennially secretive, it was not surprising
that the BIS refused to answer BullionStar’s question directly, but at least
they replied. The BIS said:
“We do not comment on specific accounts/holdings of central banks or
of the BIS. Please see our latest Annual Report and
the monthly
financial statements on our website for details on gold.
Further information can be gleaned from central banks directly
and there is some discussion of gold reserves in BIS Paper 40 (Section
2) and BIS
Paper 58.”
While there is some discussion of gold in BIS Papers 40 and 58, there is
no discussion for the reasons why central banks hold gold as a reserve asset.
Survey Methodology
The cutoff point for this survey was the Top 42 gold holding central banks
in the world, as this allowed the inclusion of Australia and Brazil, both of
which are large gold holders and both of which are also large domestic gold
producers. Between them, these 42 central banks and monetary institutions
claim to hold 32,075 tonnes of gold, which is 95% of the 33,790 tonnes of
gold claimed to be held by the 100 central banks on the World Gold Council
list.
Of the central banks and institutions contacted, 21 replied with
definitive responses. Arguably, this is quite a high response rate given that
it was surveying a diverse cross-section of central banks from around the
world on a subject which central banks are traditionally quite secretive
about. Of the central banks in the Top 42 list, emails were sent to all of
those that were contactable by email. In a few cases a web contact form was
used.
Five central banks were not contactable as they did not have any obvious
email address or web contact form. These banks were from Lebanon, Venezuela,
Mexico, Taiwan and China. The Chinese People’s Bank of China is notoriously
difficult to contact, even for BullionStar which has been writing about the
PBoC and the
Chinese Gold Market for years.
Four central banks had a bounce back on the email addresses stated on
their websites. These were the central banks of Algeria, Egypt, and
Indonesia. None of the three banks contacted by web form responded. These
were the central banks of India, Turkey, and Saudi Arabia.
Not surprisingly, banks from more developed and democratic countries have
a more transparent means of being contacted and they maintain media and
communications staff. Therefore it is logical that these banks are more
likely to have responded.
Of the 9 central banks and institutions which did not respond within a
reasonable time-frame, they were then re-contacted, asking them had they had
time to look at the query. Nearly all of these banks still did not reply.
These institutions were the US Treasury, and central banks from the Russia
Federation, South Korea, Kuwait, Kazakhstan, Belgium, Netherlands, Thailand,
and Italy.
Its notable that the US Treasury, which claims to have the largest
official gold reserves in the world, 8133 tonnes of gold, did not respond as
to why it supposedly holds the largest gold reserves in the world. These
supposed US gold reserves are as large as the gold reserves of the next three
countries combined (Germany, Italy and France).
The IMF, headquartered in Washington DC, sent a generic reply to say that
they had received the query, but they never responded. The Central Bank of
Iraq received the query, forwarded it to their operations department, but
there was no subsequent response.
Some of these non-responding banks have ‘reasons we hold gold’ sections on
their websites or in their annual reports, so for anyone interested, those
information sources could be consulted.
Conclusion
In their own words, the reasons central banks hold gold in large
quantities are many fold, however there are consistent themes in the central
banks’ explanations. Many of the respondents cited gold’s ability to be
mobilized in a crisis, that ‘gold holdings can be activated in an emergency’,
that gold is an ‘emergency reserve in a crisis’, ‘a contingency against
unforeseen events’, a form of ‘insurance’, or as the Bank of England says ‘a
war chest’ and the ‘ultimate asset to hold in an emergency’. As such, nearly
all central banks referred to gold as a safe haven asset.
Many central banks mentioned gold’s high liquidity, and some referred to
the ability to use their gold to raise liquidity in a foreign currency, even
for foreign exchange intervention.
Gold’s role as a hedge against inflation was cited in a number of the
central bank answers, which explains why central banks look to the gold price
as a barometer of inflation expectations.
Many of the banks also pointed out that because of the unique attributes of
physical gold, such as limited supply and mined into existence, gold does not
have any counterparty risk or credit risk, and because it is not issued by
governments, it has no default risk.
The return generating potential of gold was also cited by a few central
banks via the use of gold lending, gold swaps and the use of gold as
collateral. Interestingly, very few of the banks that responded
directly mentioned gold lending, although many of these central banks do
engage in gold lending. This in itself highlights the absolute secrecy
surrounding all data relating to the gold lending market which is centred in
London at the Bank of England and also through the Swiss National Bank in
Berne and the Banque de France in Paris.
Many of the respondents also highlighted gold’s portfolio diversification
benefits. Because its price is not affected by economic events in the same
way as the prices of financial securities, the gold price is not highly
correlated with the prices of other assets. Gold therefore brings stability
to a reserve asset portfolio.
With such widespread support among the world’s central banks for holding
physical gold, as a safe haven, as an inflation hedge, and as a form of
investment diversification, their enthusiasm for gold in 2018 looks as
strong as it has ever been in any decade of the modern era.
Ronan Manly
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