The case for gold

Reserve asset management

Foreign reserve asset 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 favourably to other traditional reserve assets with respect to these guiding principles – especially given the current unprecedented monetary policy environment.

  • Safety: Investing in relatively safe assets is one of the most important aspects of a central bank reserve manager’s job. As such, many reserve managers seek financial instruments, such as gold, that help preserve their capital, ensure diversification of their portfolio, adequately mitigate risks as much as possible, and serve as valuable collateral, should the need arise.

Chart 1: Financial asset performance during times of crisis

Chart 1: Financial asset performance during times of crisis

Data as of

*Crises include Black Monday: 9/1987-11/1987, LTCM: 8/1998, Dot-com: 3/2000-3/2001, September 11: 9/2001, 2002 recession: 3/2002-7/2002, Great recession: 10/2007-2/2009, Sovereign debt crisis I: 1/2010-6/2010, Sovereign debt crisis II: 2/2011-10/2011events. Data from January 1986 to April 2016.

  • Liquidity: For reserve managers, having safe assets is not enough. They need to know they will be able to deploy these assets during times of financial stress, if and when the occasion arises. As the IMF recommends, “reserve managers need to be certain that reserves can be liquidated in a prompt and efficient manner to provide the necessary foreign exchange for the implementation of policy objectives.[1] 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. 

Chart 2: Size of major sovereign debt markets and gold

Chart 2: Size of major sovereign debt markets and gold

Data as of

Sources: Agence France Tresor, Australia Office of Financial Mgmt, Bank for International Settlements, UK Debt Management Office (DMO), Germany Finance Agency, Japan Ministry of Finance, SIFMA, World Gold Council; Disclaimer

*Gold is the sum of the above-ground stock of bars and coins, ETPs and official sector (or "Financial Gold"). Shaded area includes Non-Financial Gold.

  • Return: Although safety and liquidity are certainly the most important aspects of official reserves, the need that many central banks have for return should not be underestimated. For some central banks, the revenue earned on their official reserves represents a significant contribution to overall government funding. Compared to other financial assets, the average annual return on gold, in US dollar terms, has consistently outperformed bonds, while its long-term performance is comparable to stocks. 

Chart 3: Gold's long term performance compared to other financial assets*

Gold's long term performance compared to other financial assets*

Sources: Bloomberg, ICE Benchmark Administration, NBER, World Gold Council; Disclaimer

*Based on local returns indices including MSCI US, MSCI ACWI ex US, JPMorgan 3-month US cash, BarCap US Bond Aggregate, Bloomberg Commodity for the 10- and 20-year average, and S&P Goldman Sachs Commodity since 1971 due to data availability. Gold performance based on the LBMA Gold Price Data between January 1971 and December 2016.

[1]Staff report, International Monetary Fund, Guidelines for Foreign Exchange Reserve Management, 2004.