Abstract
The gold is still a reserve asset with specific features yet the variants of reserve management have improved considerably. Tendency to maintain ultra-low real interest rates potentially should affect the upward shift in demand on gold because alternative costs of holding it are declining. Demand for gold has indeed risen from the side of central banks recently. At the same time, there is no consensus in economic literature about optimal share of gold in foreign exchange reserves. However, it is presumed that incentives for more diversification are stronger than reserves hoarding is abnormal. Commodity exporters have accumulated large reserve over the last decades. Thus, their diversification decisions in favour of gold seem to be natural. However, empirical analysis paints a more complicated picture. A) Commodity exporters are getting to be more and more heterogeneous in terms holding gold as a share of foreign assets. Such heterogeneity is more vivid compared to the world as a whole. B) Distribution of gold reserves among commodity exporters is changing toward increasing number of countries with gold holdings over the median size for the group. C) There is direct correlation between global commodity prices and gold holdings in tons, but an inverse relationship in the case of share of gold in reserves. This leads to the conclusion that there are two types of demand on gold: endogenous as a function of gradual hoarding of foreign exchange reserves, and specific, that is driven by specific portfolio management needs and non-economic factors. This finding is consistent with features of holding reserves in countries with large hoarding and strong vulnerability to terms-of-trade shocks and features of political regimes in countries with resource abundance.
Highlights
Gold has always been considered a special reserve asset
Peculiarities of gold as a reserve asset have long drawn the attention of central banks
The issues concerning the criteria for managing the portfolio of foreign assets that take into account the peculiarities of price dynamics in the gold market remain under scrutiny
Summary
Gold has always been considered a special reserve asset. It has certain peculiarities: this asset is not someone’s liability, and not a financial instrument in its purest form; gold is not subject to the risk of bankruptcy or insolvency; its value is substantial in content as a physical asset, even if the price is determined by the market; gold plays the role of a hedging tool for geopolitical, geoeconomic and even security risks. Given the medium-term trend of rising commodity prices and falling global interest rates, gold could be considered as one of the directions for diversification of foreign exchange reserves for countries prone to hoarding of foreign assets due to structural features and implemented mechanisms of macroeconomic stability. As shown by Zulaica (2020), there has recently been a clear inclination towards increasing gold reserves in the world and, in particular, in countries that do not qualify as developed It remains unclear whether this trend is inherent to commodity exporters as a group of countries that can potentially be united by a common pattern of “commodity prices – significant reserves – search for options to diversify reserves – a growing share of gold in reserves». The article considers the role of gold in the foreign exchange reserves of commodity exporters, taking into account the trends in commodity prices and changes in the distribution of indicators characterizing the accumulation of gold reserves
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