In the past few years, we’ve seen a growing desire of turning away from the US dollar as the global reserve currency. Gold has become a serious competitor to the dollar: central banks in many countries keep building up their gold reserves, and this trend will continue in 2021.
According to the most recent report by the World Gold Council (WGC), circa 21% of the world’s central banks plan to buy for gold this year. There are many reasons for this: first of all, gold is a traditional safe haven asset. Another factor (much less often discussed but just as important) is gold’s ability to maximize the risk-adjusted income and serve as collateral for credit at the same time. A survey by the WGC has also shown that none of the central banks plan to sell off their reserves, though in 2020 4% were ready to take this step.
The report goes on to say that central banks’ interest in gold remains high, while the continuing corona crisis makes it essential to hold liquid assets decoupled from the dollar. Inflation is yet another factor that will affect how central banks allocate their investment resources in the next few years. The WGC believes that central banks will remain net gold buyers, though perhaps to a lesser extent than in the past few decades.
Gold’s good performance during the corona crisis is probably one of the main reasons why central banks keep buying in in 2021. Here are a few more:
Gold is a great means of diversification. It’s not dependent on the prices of stocks or bonds and can make a portfolio more diversified while keeping it liquid.
Gold is trustworthy and reliable. It’s been a safe investment and a store of value for decades, and is likely to maintain this reputation.
Gold is a weapon against inflation. Now that the rate of inflation is growing, it’s become even more important to hold inflation-resistant assets. As the Fed and other central banks are keeping interest rates near zero while printing huge amounts of money every month, the need for a hedge against the inflation is even more pronounced.
Gold bears no counterpart risk. The gold market is global; the yellow metal cannot go bankrupt, default on its obligations, or create any other issues for its holder. Gold is recognized as valuable across the gold and can always be sold.
Gold can be used for monetary interventions. It’s one of the key currencies, and the fact that central banks keep it in their reserves makes it a powerful tool of intervening in the market.
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