What does the gold reserve mean?
By the end of this article, you will be able to understand why any government owns so much of gold reserves and how crucial it is for any country to own gold. You will also understand the consequences a country will have to face if they fail to carry the minimum amount of Gold Reserves.
Every government tries to own a lot of gold in all possible ways. However, the reasons might be different. Due to the chemical composition that gold has, it makes it unreactive to literally any solid or any other substance for that matter. Therefore, it proved to be an asset for the governments and civilians for decades and ages. Nevertheless, the meaning of gold changed over the years, and all governments which were a part of central banks or treasury secretaries now own a significant amount of gold reserves in the form of segregated investment of foreign currencies, foreign governmental bonds, and precious metals.
It is not important how much of gold is purchased and held by a government in the form of the reserve but how much of that gold held represents its total reserves. Based on how much gold reserve they are carrying, policymakers frame the economical and political outlook of the nation. This is the significance of Gold.
What does the Gold Reserve of a country measure?
- Gold Reserves is used to hedge against inflation – The state governments buy large amounts of gold when the country starts to experience high levels of inflation. As the supply of gold is limited during inflationary times, the demand for gold increases. Due to the characteristics of gold, it is able to maintain its high value better than other forms of currency. Whenever investors feel that the value of the currency might decline even they start buying loads of gold against that currency.
- Gold Reserve determines imports and exports – Any currency is strongly connected to the value of its imports and exports from the country. When imports exceed exports, the value of the currency will decline, and likewise, the currency will appreciate when net exports are higher. Thus, a country that exports gold and has an excess of gold reserves will see an increase in the strength of its currency and gold prices rise. As a result, the value of total exports becomes higher.
- Gold Reserve determines the value of its own currency – There is a direct relationship between gold and local currency. If there is high demand from the manufacturing sector for gold needed for production, then it will cause the gold price to rise. The currency on the other will be slightly higher or around the same price. But one needs to analyze the conditions and look at other factors also appropriately.
- Gold reduces the value of that currency used to buy it – When central banks make many transactions in gold, it affects the demand and supply of the local currency and may cause inflation. This is because banks need to print more cash in to be able to buy gold, thereby creating an excess supply of fiat currency.
A reliable source of Information on Gold Reserve with Frequency of release
Every country keeps a record of this data and keeps updating this information as and when the central makes purchases and selling of gold reserves. This data is then released to the media and other business channels. There are some open-source economic websites which keep a watch on this news and give their own analysis for the numbers out and future expectation.
The gold reserve in an economy is released on a quarterly basis as this is a transaction that is carried out by nations for longer terms and purchases are made not often. Below is a list of countries along with their gold reserves in the recent quarter.
GBP (Sterling) – https://tradingeconomics.com/united-kingdom/gold-reserves
What do traders care about the Gold Reserve and its impact on the currency?
As we have seen how gold reserve matters for any country and actions the government takes to ensure that that they have enough portion of the reserve with them. Hence, we can surely say that more the country tries to keep gold in exchange for currency the higher will be the interest rates. These high-interest rates create confidence among foreign investors, and they feel that the economy is safe to make their investments. The prices of the commodities are very much dependent on the currency and vice versa. So gold reserves is a very important economic indicator when it comes to making big investment decisions.
The Bottom Line
Given the fact that Gold has so many uses, gold never loses its value, and its role shall keep changing with the economies and policies. And the relation between gold and banks has also been evolving from time to time. We can classify countries with respect to their gold reserve system into three different types. a) USA and Eurozone that own the most needed currencies have no way but to carry their reserves in gold and not much space for the desired currencies. We need to keep in mind that the USA is the fourth gold producer. b) Emerged economies such as the Commonwealth countries have a different perspective by liquidating the reserved money to be used for development, and other developed countries had followed their footsteps – Japan and Switzerland. c) Emerging economies such as Russia, China, and India adopt the same idea of the second group as an inevitable result to develop the currently stagnating economy.