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Strategic asset allocation
Strategic asset allocation (SAA) defines the long-term proportion of individual assets that should be held in a portfolio in order to maximise risk-adjusted returns. While the ebbs and flows of the financial markets might dictate tactical decision making, which will require short term deviations from the SAA, the SAA provides a foundation for a portfolio, and is reflective of a reserve managers long term views and liquidity needs.
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Managing risk
A central bank may wish to add a tactical overlay to its strategic allocation in order to protect it from a particular set of downside risks or “tail risks” it deems likely. These risks will be determined by the prevailing macroeconomic environment and will change over time. Regardless of the scenario that reserve manger envisions, gold serves as the most superior hedge or tactical overlay strategy for most macroeconomic events and general global systemic crises.
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Enhancing liquidity
The 2007/2009 financial crisis clearly demonstrated the challenges of running a liquidity portfolio. Many markets that reserve managers had assumed to be deep and liquid proved to be the exact opposite and assets could only be sold at a large discount. This was even true of some AAA-rated assets: credit ratings proved no guide to liquidity.
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Trading and vaulting gold
Most central banks purchase gold directly from bullion banks, or buy domestic mine production or locally recycled gold. Banks buying gold bars will typically purchase it in the global OTC market, the majority of which is settled via gold bars stored in London (“loco London”).
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Central Bank Gold Agreements
Western central banks have a long history of gold agreements between each other and with the private sector. The gold sales of the Eurosystem central banks, Sweden and Switzerland are currently covered by the third Central Bank Gold Agreement (CBGA3). Like the previous two Agreements, this covers a five-year period, in this case from 27 September 2009 (immediately after the second Agreement expires) to 26 September 2014.
