The case for gold
Reserve asset management
Foreign reserve managers around the world are responsible for investing trillions of dollars in financial assets. Although the appropriate asset allocation is unique to each institution, almost every reserve manager follows the mantra of: safety, liquidity and return. Our analysis shows that gold compares extremely favourably to other traditional reserve assets with respect to these guiding principles – especially given the current unprecedented monetary policy environment.
Safety: As a high-quality, liquid asset, gold helps preserve capital, diversify portfolios, mitigate risks, and serves as valuable collateral.
Liquidity: Operating in large markets that rival those of major sovereign bonds, gold is one of the most highly traded financial assets, with low transactional costs and universal acceptance.
Return: Since 1997, the average annual return on gold, in US dollar terms, has consistently outperformed the average returns on US Treasuries, Eurobonds, Japanese government bonds, and UK gilts over 10-year, 5-year and 1-year time horizons.
Gold in a world of negative interest rates
We are in an unprecedented phase in monetary policy. Central banks in Europe and Japan have now implemented Negative Interest Rate Policies (NIRP) to counteract deflationary pressures and, in some cases, currency appreciation. Investors, including central bank managers, should assess the implications of holding bonds with negative return expectations on portfolio composition and risk management.
Gold in a multicurrency reserve system
For many decades, the US dollar has been the main reserve currency worldwide and it still accounts for more than 50% of international reserves. However, its share has been gradually declining, while that of other currencies, like the Chinese RMB, has grown, signalling the potential emergence of a multicurrency reserve system.
Central bank diversification strategies
While the dollar is still the primary global currency, its long-term dominance is less certain. In response, central banks are reducing allocations to US dollars and euros while increasing purchases of traditional assets such as gold and Japanese yen and new alternatives including the Chinese renminbi.