Informed views, research, and high-level advisory services from the World Gold Council
Regular publications from the World Gold Council’s in-house thought leaders and industry experts, along with prominent academics and think tanks, provide informed views, research, and high-level advisory services to central bankers, policymakers, regulators and investors around the world.
Gold, the renminbi and the multi-currency reserve system
Demand for gold is likely to rise as the world heads towards a multi-currency reserve system under the impact of uncertainty about the stability of the dollar and the euro, the main official assets held by central banks and sovereign funds.
This is the conclusion of a wide-ranging analysis of the world monetary system by OMFIF, the Official Monetary and Financial Institutions Forum formed around a core of public sector asset and reserve holders at the heart of world finance.
Driven by China’s desire to increase its financial influence, the Chinese renminbi is likely to emerge gradually as a genuine international currency as Beijing eases restrictions on its use in transactions and investments abroad, but is unlikely to pose any immediate threat to the dollar.
Any setbacks to the renminbi’s rise as a reserve currency will probably benefit gold as a result of doubts about the overall strength of world monetary arrangements.
The OMFIF report, the product of analysis of historical and contemporary data and discussions with global policy-makers and financial experts, explores the consequences for official asset management of greater dispersion of economic power around the world. It states: ‘The world is headed towards the uncharted waters of a durable multi-currency reserve system, where the dollar will share its pivotal role with a range of other currencies, including the renminbi.’
The OMFIF report includes a foreward by Prof. Lord (Meghnad) Desai, chairman of the OMFIF Advisory Board. In reflecting on the different economic scenarios for the five years 2013-18 which the report studies, he states: ‘Whether the world moves into full crisis with the end of the euro, or whether we have a recovery, or whether we experience something in between: all paths lead to towards a multi-currency system, in which gold’s role is likely to become more significant.
Our latest insights
Central bank diversification strategies: Rebalancing from the dollar and euro
Central banks have begun to reduce reserve portfolio allocations to US dollars and euros in favour of alternative reserve assets. A portfolio optimisation analysis concludes that gold, with its lack of credit risk and deep and liquid market, is one of the most attractive alternatives in this diversification process. Accordingly, building gold reserves in tandem with new alternatives is an optimal strategy as these markets need time to develop and allocations to gold remain largely below optimal levels.
RBS Reserve Management Trends 2012: Optimal gold allocation for emerging-market central banks
This chapter reproduced courtesy of the World Gold Council was first published by Central Banking Publications in their annual RBS Reserve Management Trends in April 2012. The chapter aims to help address the question of how much gold emerging market central banks should be holding from a domestic currency perspective. This study examines the performance of a typical central bank portfolio when denonominated in nine emerging market currencies and finds that gold’s stability across a range of currencies supports higher optimal gold allocations.
US Case Study: Enhancing commercial bank liquidity buffers with gold
As part of gold's growing financial usage the World Gold Council conducted a case study to examine gold's potential role on US bank balance sheets as part of new liquidity buffers being discussed in global banking regulations within Basel III. The following case study examines the effect of adding gold to the Basel III Liquidity Coverage Ratio (LCR) and finds that, by including gold as an eligible asset in bank liquidity buffers, commercial banks would reduce the volatility of their LCR portfolios, reduce the value-at-risk of their portfolios, and improve their risk-adjusted returns.
European Case Study: Enhancing commercial bank liquidity buffers with gold
As part of gold's growing financial usage the World Gold Council conducted a case study to examine gold's potential role on European bank balance sheets as part of new liquidity buffers being discussed in global banking regulations within Basel III. The following case study examines the effect of adding gold to the Basel III Liquidity Coverage Ratio (LCR) and finds that, by including gold as an eligible asset in bank liquidity buffers, commercial banks would achieve lower levels of risk and improve their risk-adjusted returns. The study also found that a portfolio with gold outperformed a portfolio without gold during the majority of the most extreme European liquidity stress events over the past eight years.
Gold as a source of collateral
The 2007-2009 financial crisis highlighted inadequacies in counterparty risk management in the global over-the-counter (OTC) market. G20 leaders have committed to address this by implementing regulatory reforms that will augment the use of central counterparty (CCP) clearing. This will in turn increase demand for the collateral assets that need to be posted with CCPs. In order to give clearing members as much flexibility as possible, CCPs have begun searching for appropriate new sources of collateral. This has become a particular focus as the credit quality of many traditional collateral assets, such as European government bonds, has deteriorated sharply as a result of the ongoing sovereign debt crisis. Gold is emerging as a solution.
The Dubai International Financial Centre states: “Our results indicate that if a relatively conservative central bank should hold gold as an asset class, its potential returns of any given level of risk (i.e. at any standard deviation) increase by several points more a year than when excluding gold from its optimal portfolio. Similarly, a dollar invested (in January 1987) by a fictional conservative central bank in an international reserves portfolio would have grown to $6.6 by May 2010 – which is about 1.5 more times than an international reserve portfolio without gold."
“CEPS concludes that: “Overall, the main findings suggest that, in the near future, motives other than inflation hedging will be the main drivers of gold market dynamics. Growth in Asia’s emerging economies, which are among the largest sources of gold demand, and financial market uncertainty, will be the most important ones. In particular, Asia is expected to decouple at least partially from trends in the eurozone, even if the worst scenario were to materialise.
Hence, while adverse conditions could slow Asian growth, demand for gold from this region should not fall significantly. Moreover, even in the most optimistic scenario for the eurozone, global uncertainty will not evaporate easily. As a consequence, the gold price may continue to trend upwards for a period driven by investment demand from both private sector and official investors."
- Liquidity in the global gold market
- The 10-year Gold Bull Market in Perspective, World Gold Council
- The Importance of Gold for Reserve Asset Management, World Gold Council
- Structural Change in Reserve Asset Management, World Gold Council
Gulf Common Currency
Gold has an important role to play in Islamic finance, according to the Dubai International Finance Centre (DIFC). The DIFC presents the case for the proposed Gulf Central Bank (a pre-requisite to a Gulf Common Currency) to include gold in its reserve asset portfolio. Gold could also play a role in providing collateral for liquidity financing as the region’s banking system develops. More