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.
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’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).”
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.”
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
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.”
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 release ECB 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.
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.”
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.
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.
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.
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.