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The Federal Reserve Building located in Washington, DC, USA

 

Central banks worldwide have held significant reserves of pure gold bullion in their coffers for centuries. Even in today's modern financial system, gold remains an essential asset for central banks.

 

But why do they continue allocating a portion of reserves to this shiny yellow metal when they could hold other lucrative assets instead?

 

Read on to learn about the policies and reasons central banks won't stop valuing pure gold.

 

Central Banks' Reasons for Holding Gold

Pure gold is a haven asset to hedge against market volatility and economic crises. During instability, investors flock to gold, increasing its value and providing central banks with an insurance policy.

Especially in today's environment of low or even negative interest rates, pure gold stands out for its ability to rise in value while avoiding decline from inflation.

Besides, allocating reserves to physical gold bullion diversifies the portfolio holdings of central banks. Because pure gold often moves independently from other asset classes like stocks and bonds, it helps central banks spread risk rather than relying solely on fiat currencies and government debt instruments. Holding alternative assets like gold improves resilience and optionality.

Gold is also one of the most liquid assets in existence. The deep global market for trading physical gold means central banks can easily buy or sell to adjust their reserves as needed. This level of liquidity is unmatched by most other alternative reserve assets. Mainly during periods of crisis or uncertainty, the liquidity of pure gold creates flexibility for central banks to shore up their balance sheets.

Furthermore, pure gold does not carry any counterparty or default risk. Unlike bonds, stocks, or even fiat currency, the value of physical gold bullion is not tied to the fate of any government, company, or individual. Gold holds inherent value as a rare tangible asset with unique physical properties.

Of course, central banks do not put all their investment in one basket. Gold reserves are typically a small portion of total holdings compared to larger sovereign debt and fiat currency allocations. But pure gold provides beneficial diversity and insurance at the margins of even a diversified portfolio of reserve assets.

The tradition and public confidence surrounding gold also influence central bank policies. Citizens and investors worldwide view gold reserves as representing financial strength and stability. Central banks know gold's symbolic weight and may factor public perception into holding robust pure gold reserves.

 

Check this article: Why Gold Investment Opportunities Shine in Bullish and Bearish Markets

 

Gold Reserve Policies of Major Central Banks

The Federal Reserve

The United States claims the world's largest official gold reserves at over 8,000 metric tons stored in fortified vaults like Fort Knox. This massive gold stockpile is valued at $450 billion, representing about 78% of U.S. reserves.

 

The U.S. has not altered its gold holdings since the 1970s. It stands by gold's role in preserving national economic health and backing the dollar.

The Deutsche Bundesbank

 

Scenic panorama of the Deutsche Bundesbank

 

Germany holds the second-largest central bank gold reserves. Germany stores over 3,300 metric tons of pure gold ingots and coins in vaults across New York, London, and Frankfurt. This gold stash equates to over $200 billion or nearly 70% of Germany's total reserves.

The Bundesbank repatriated hundreds of tons of gold from New York between 2013-2017. It remains committed to being a global leader in responsibly sourcing, storing, and valuing its gold.

 

Give this article a read: Market Movers - How Major Events Impact Your Investments

Banque de France

France manages the world's 4th largest central bank gold stockpile, holding over 2,400 metric tons of pure gold. This represents about 65% of France's total reserves. By keeping more than half its reserves in gold, France reaffirms its faith in gold as a store of value with no credit risk.

 

The Banque de France also actively loans portions of its gold reserves to domestic jewellers and metalworkers to support economic growth.

The People's Bank of China

China, being the world's largest gold producer, has rapidly expanded its central bank's gold holdings since the early 2000s. The People's Bank of China now claims over 1,900 metric tons of gold worth approximately $125 billion. Gold accounts for just 3% of China's total reserves because it holds massive foreign currency reserves.

The Russian Central Bank

After emerging from the ruble crisis in the 1990s, Russia began steadily accumulating central bank gold reserves. Today, the Russian Central Bank holds over 2,300 metric tons of gold worth about $160 billion. This represents over 20% of Russia's total reserves.

By contrast, Russia's central bank holds less than 15% of reserves in foreign currencies. Russia now targets gold to comprise 20% of reserves moving forward.

 

Here's an interesting read for you: What Are Bank ETFs?

The Reserve Bank of India

The Reserve Bank of India has been one of the leading central bank buyers of gold in recent years. Its nearly 860 metric tons of pure gold reserves are valued at over $60 billion, making up about 7% of its total holdings. India is the world's second-largest gold consumer and depends on gold for economic growth. Its continued central bank gold purchases demonstrate that importance.

Bank of Japan

As the world's largest official holder of foreign exchange reserves, Japan holds relatively little gold compared to its total central bank reserves. But the Bank of Japan maintains robust gold reserves of nearly 840 metric tons, valued at $55 billion and accounting for about 2.5% of its holdings. This reveals that even central banks with the deepest pockets for foreign currencies still allocate a portion to gold.

The Swiss National Bank

 

Viewpoint of The Swiss National Bank facility

 

Despite its small size, Switzerland punches above its weight in gold. The Swiss National Bank holds over 1,000 metric tons of gold ingots across dispersed vaults. This massive gold stock is valued at nearly $90 billion, which equates to about 5% of the country's total reserves.

Switzerland was a leader in repatriating its foreign-stored gold. It remains a strong advocate that responsible central banks worldwide should hold physical gold bullion.

 

You might also like to read: How Gold Mining Stocks Perform During Market Crises

 

Bottomline

Central banks worldwide continue to hold significant gold reserves, even as they also maintain extensive holdings of foreign currencies, government bonds, and other assets. While the specific gold policies and allocations vary by country, central banks agree on gold's core benefits as a haven asset with liquidity and intrinsic value.

Traders and investors should pay attention to central bank gold policies and trends, as they provide important signals about global economic confidence and stability. With gold reserves backing major currencies, we are all indirectly impacted by central bank decisions on their gold stockpiles.

 

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