Why Gold Matters to Today's Banks

Why Gold Matters to Today’s Banks

June 21, 2019

There are those who believe that gold no longer matters to today’s banks, but they would be mistaken. In fact, the central banks still hold the largest above-ground stockpile of gold bars, estimated at about 33,800 tons of gold. Several central banks claim to be the world’s top holders of gold bullion, holding thousands of tons each. However, the central banks rarely, if ever, divulge exactly how much gold they lend, swap or use as collateral, which means that one cannot be certain exactly how much gold they currently hold.

The worldwide central bank group (the official sector) includes central banks (e.g. Deutsche Bundesbank), various international monetary institutions, national monetary authorities and more. What may interest you is that these banks typically don’t actually own the gold they have in their possession, but rather control it on behalf of their nation states.

So why exactly do these banks hold gold, especially if there are people who believe gold no longer matters? The simple answer is that gold does still matter—very much so, in fact. But why, exactly?

Here are a few examples of why specific countries’ banks say they continue to hold on to gold and even encourage gold investing among their customers:

  • Germany: Germany stores gold in London and New York, and does so in large part because of the high liquidity of gold, as well as the important role gold can play in times of financial crisis or national/international emergencies. The Bundesbank has gold reserves that are kept abroad specifically to be protected and then be activated in the event of an emergency.
  • Switzerland: Switzerland’s Swiss National Bank emphasizes the diversification benefits and risk optimization associated with gold. The national bank continues to hold gold because a certain proportion of gold helps to reduce a balance sheet risk. In fact, Swiss federal law maintains that the SNB must hold a certain percentage of its currency reserves in gold for this very reason.
  • Sweden: The Swedish Riksbank is the oldest central bank in the world. It holds its gold primarily for reasons such as diversification, foreign exchange intervention and liquidity. It says gold is an asset that can be used to fund liquidity support, and that the combined value of gold and currency is more stable than those of currency and gold separately.
  • United Kingdom: The United Kingdom’s gold holdings are held in the name of HM Treasury, not in the name of the Bank of England. The U.K. continues to hold gold because of the value it has in emergency scenarios, especially in times of financial instability and uncertainty. It also helps to guard against inflation, and cannot be defaulted on.
  • Poland: The Polish central bank, Narodowy Bank Polski, holds on to gold because of its lack of credit risk and its various diversification benefits, as well as its ability to guard against inflation.

As you’ll notice, many of these reasons are very similar across different countries. It shows just how useful gold investing can continue to be to central banks, and why it’s not going anywhere anytime soon.

- by Steve Hunt

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