- 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. 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.
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.