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Why do countries maintain large gold reserves?

By Finserv MARKETS - Aug 2,2019
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Why do countries maintain large gold reserves?

Since time immemorial gold has remained a symbol of personal and national wealth and power due to its unique chemical properties. Since the Bank of England introduced the gold standard system to the world in 1694, gold was an integral part of the world’s economic system until the 1930s when countries began to abandon the gold standard.

At one point of time, central banks around the world were selling more gold than buying them. However, gold gradually started to reclaim its sheen by 2010 as a safe investment option when governments around the world started to increase their gold reserves as protection against economic uncertainty. Since then central banks have added millions of tons of gold to their foreign reserves.

As of 2018, the United States had the largest reserve of gold at more than 8,000 metric tons. Germany stood second with more than 3,000 metric tons and Italy third with more than 2,400 metric tons.

Top Six Largest Gold Reserves

Country

Reserve (Metric Tons)

% of Foreign Reserve

U.S.A

8,133.50

75.2%

Germany

3,370

70%

Italy

2,451.80

67.9%

France

2,436

60%

Russia

2,119.20

NA

China

1,864.30

NA

Source: The Gold Telegraph

As per reports, gold buying by central banks has increased 75% year-on-year and is right now at a 50-year high and driving gold prices worldwide. As retail investors also rush to buy gold online and offline, including gold ETFs, sovereign gold bonds and digital gold, they are driving prices even further. However, this phenomenon begs the question: Why are governments around the world increasing their gold reserves when the gold standard is no longer effective and gold is a low-yield asset class?

Why do countries maintain large gold reserves?

One of the simplest answers to that question is that gold is a safe investment option and is not at the mercy of changing economic and political situations. Other reasons why countries maintain large gold reserves include:

Worldwide acceptance

The U.S. dollar or the Indian National Rupees (INR) has to be guaranteed by the governments of the respective countries. The value of foreign sovereign debts depends upon the economic state of the country. On the other hand, gold has intrinsic value and is accepted anywhere in the world. No matter what the economic or political situation or the geographical location, a piece of gold will regain its value and will always be worth something anytime, anywhere in the world.This is also the reason why small investors or households turn to gold as some form of protection during difficult financial situations. In India, digital gold is gaining popularity as it can be bought in small installments and you can buy gold online without visiting a store. For instance, if customers buy digital gold from Finserv MARKETS they are assured of 99.5% pure, 24 karat gold that can be bought by investing as low as Rs. 100. Buying jewellery will not cost you less than Rs. 5,000 or even a gold coin will cost you more than Rs. 3,000.

Gold as insurance

Central banks also buy gold as an insurance cover against economic disasters such as hyperinflation, a situation when the prices of goods and services increase by more than 50% in a month. Gold is a highly liquid asset can be used to intervene when currencies are about to fail. For example, if the USD sees a drastic decline in value in comparison to other currencies, the federal government can sell gold and buy U.S. dollars to sustain its value.

The U.S. Dollar

There was a time when the U.S. dollar was seen as a safe investment option by many governments and the U.S. dollar was a significant part of their foreign reserves. However, following the 2008 recession in the U.S., central banks started losing faith in the dollar and began to increase their gold reserves drastically.

Today, the U.S. government itself maintains the largest gold reserve in the world of more than 8,000 metric tons. Though the U.S. dollar is still the world’s primary reserve currency, the U.S. government has to hold such huge reserves of gold to support the value of its currency. Again, the U.S. has been a trendsetter in this area and other countries have only followed on its path.

Popularity of gold in India

India is among the top 10 consumers of gold and in the top 10 list of countries with the largest gold reserves. Gold never fails to shine in India because it is an integral part of Indian culture, religion and tradition. With innovative systems such as digital gold, people can now buy gold online without worrying about quality, affordability and storage.

The popularity of gold in India can be judged from the fact that there are 8 crore digital gold account holders in India now within a span of 6 years. That is double the number of people that have opted for Demat accounts in the last 2 decades.

If you are yet to join the gold rush, let Finserv MARKETS help you apply for a digital gold account and secure your financial future with a trusted partner loved by more than 100 million customers across the country.

“Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere”!

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