February 22, 2024

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What share for gold? On the interaction of gold and overseas trade reserve returns

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Gold investments however form a considerable share of central banking institutions and governments’ Fx reserve portfolios. We talk to whether or not this substantial share is justified from a danger-return standpoint, even though investigating the range of variables that make this a tough dilemma.


We make three contributions. 1st, we target on how gold influences portfolios shaped purely of preset earnings assets, as these far more intently resemble those people managed by central financial institutions and governments in observe. Second, we analyse a wide selection of possibility-return measures, above and above the commonly used signify-variance framework. 3rd, we go further than the dialogue of what is exceptional for portfolios on ordinary (as typically observed in the literature) to emphasis on what may be exceptional in severe situations, ie at the tail of the possibility distribution. This is of good interest to reserve professionals.


From a market place chance viewpoint, a minimal-duration, reserve currency fastened earnings portfolio may possibly reward only from extremely smaller gold allocations (in between % and 5%), on regular. Nonetheless, sizeable gold holdings could be justified, from a purely quantitative standpoint, for portfolios with a bigger period and for reserve supervisors who evaluate their returns in a non-reserve forex. In addition, when looking at the added benefits of gold as a protection in opposition to an extreme celebration, we locate that large allocations (of in between 20% and 50%) may perhaps be ample in some situations. Our final results recommend that choosing an acceptable share for gold in reserve portfolios is a sophisticated task. The solution depends crucially on equally the goal (policy goals) and implementation (numéraire, hazard tolerance etc) of the reserve management procedure.


Just about five decades immediately after the collapse of the Bretton Woods system, gold carries on to form an vital share of world foreign trade reserves. This might be since gold has ordinarily presented reserve managers many gains, these kinds of as the absence of default hazard. This paper explores irrespective of whether these massive financial investment shares in gold are also justified from a risk-return standpoint, or whether any other explanations have to be introduced to bear. To do this, we go past the basic software of portfolio optimisation procedures, comprehensively analysing all doable prolonged-only combos of gold and representative mounted earnings reserve portfolios. We conclude that the market place possibility involved with gold is sizeable when evaluated against a wide variety of standards, such as mitigating portfolio volatility, tail-danger, the likelihood of decline, and steps of diversification. This will have a tendency to limit total allocations. However, for portfolios with increased sensitivity to fascination premiums (duration) and for reserve administrators who measure their returns in a non-reserve currency, we locate evidence that gold may perhaps functionality as a hedge, earning it less complicated to justify sizeable gold holdings from a purely quantitative viewpoint.

JEL Codes: E58, F31, G11, G17.

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