Central banks of this world manage the fiat currency policy of their country or region. Even though they are responsible for the fiat currency units, central banks diversify their reserves with other safer assets. Preference is given to the acquisition of gold reserves. According to the World Gold Council, central banks hold one-fifth of all gold ever mined. Gold has the great advantage that it never loses its shine, unlike silver, for example.
But why do central banks buy gold?
Currency units are subject to fluctuations in value due to changes in a country’s economy or crises. In case of a crisis, central banks like to increase liquidity and create more currency units, which devalues the currency. The advantage of gold in contrast is that it cannot simply be created out of thin air. Gold is available in finite quantities, more precisely, gold is present in the earth’s crust to 0.00000031%1. This makes gold a very good protection against inflation and economic or financial crises.
Another aspect can be seen in the relationship with the U.S. dollar. Gold usually moves inversely to the dollar. So when the dollar loses value, the gold price rises.
Moreover, gold is seen as an object of value for thousands of years. Gold is considered an object of value regardless of the economic situation.
As currencies come and go, gold is considered stable, which makes it, along with silver, true money.
Since the COVID-19 crisis, inflation is higher than it has been for a long time. Central banks indicate that inflation is only transitory at the moment, but citizens should still be concerned about purchasing power. Factors such as higher wages, for example, are unlikely to be reduced again after the pandemic. In addition, with regard to the expansion of infrastructure, push towards electric vehicles, and clean energy, the demand for commodities will continue to rise.
Should the average citizen hedge with gold?
Considering the fact that currencies come and go makes a currency an unstable quantity.
Given the declining purchasing power of currencies, gold becomes even more attractive. A small allocation as a hedge in gold is definitely worth considering. And if central banks see the risk and hedge, why shouldn’t the average citizen consider it?
- Gray Theodore (2018), Touch Press Inc.