Market Overview

It is never wise to invest all of one’s money in one place; it is widely believed that one should diversify. For this reason why should the Central Banks be different? The price of gold can fluctuate, but the exchange and interest rates of currencies held in reserves fluctuate as well. A plan of reserve diversification will normally provide less risk than one based on a single asset, and although over the last 10 years or so gold has not surged as much as it should have, it has been a reliable asset…after all gold is still gold.

Economic Security

Gold is a unique asset in that it is no one else’s liability. The price of gold is not directly influenced by the economic policies of any one country. Gold has always maintained its value over the long haul and therefore is definitely suited to make up a good portion of the Central Bank’s reserves, as well as private individuals.

Unexpected Needs

Gold fulfils a "war chest" role. In emergency situations, countries and people may need liquid resources. Gold is truly liquid and is universally acceptable as a means of payment it can also serve as collateral for borrowing. Gold can be considered the only international acceptable currency.

Physical Security

In the past, countries have imposed exchange controls, and even worse, total asset freezes. Reserves held in the form of foreign securities are always at risk because of this. Gold does not have this weakness as an investment, and is free from any one country collapsing. If you ask those in the Far East that still have their homes and businesses, they will tell you that gold saved their lives. Those that did not have gold and just held on to government bonds, or currency, were virtually wiped out during the Asian flu.

Confidence

Throughout history, and now, the public takes comfort with the knowledge that its government has gold reserves. Over the past few years we have seen backlash for governments that do not hold, or
sell off their gold reserves (such as Switzerland) gold is an indestructible asset that is not vulnerable to inflationary worries that plague paper money. Many countries point out their gold reserves when promoting the strength of their currency. The IMF (International Monetary Fund) has recognized that the fund’s holdings of gold give a fundamental strength to its balance sheet. The same rule applies to gold held by the central banks.

Income

Gold is quite often described as a non-income-earning asset, or a stale commodity. This is untrue. There is a very large gold lending market, which generates good returns. Gold can also be traded to
generate profits. There may be a slight cost to hold gold, but in a world of low interest rates, this is less than one would be led to believe. The other overwhelming advantages of gold will easily offset any such costs.

Insurance

The opportunity costs of holding gold may be viewed as comparable to an insurance premium. It is the price deliberately paid to provide protection against a highly improbable but highly damaging event. This could include, War, Economic meltdown, Y2K related problems, an unexpected surge of inflation, etc. Many financial advisors insist that their clients carry a certain percentage of their portfolios in gold or at least something based on gold.