A report by Natalie Dempster of World Gold Council. The report examines how gold can help a central bank meet its foreign reserve management objectives. A portfolio optimiser is used to show that the efficient frontier of a typical developing or emerging market central bank can be enhanced by adding gold - in other words, a bank can enhance its risk-adjusted returns. The quantity of gold depends on a central bank’s risk appetite: the report finds that an allocation to gold of between 2.4 and 8.5% is optimal for a bank with around a 5% risk tolerance. At a risk tolerance of 8.3%, the allocation to gold increases to 29%. The report also examines the case for an additional tactical and liquidity allocation to gold, in light of today’s macro- economic risks and the liquidity challenges experienced during the 2007-09 financial crisis.
