The central banks' gold reserves
Ever since movie villain Goldfinger tried to raid Fort Knox in the James Bond adventure of the same name in 1964, most people are familiar with the term “gold reserves”.
But what purpose do they actually serve? Just like foreign currencies – outside the US mainly held in dollars – and some other assets, gold serves as a foreign exchange reserve, used by the respective country’s central bank to shape monetary policy. The fact that gold has become an important component of these reserves for most countries is due to its independence from financial systems, its reputation as the oldest and hardest currency, as well as the fact it was linked to the world’s most important reserve currency, the US dollar, for a very long time. Since the abandonment of the gold standard, i.e. the detachment of the gold price from the US dollar, central banks have kept the precious metal primarily as a national reserve for times of crisis and to offset risks linked to fluctuations in the US dollar.
Global gold reserves peaked in 1965
Growing national income in many countries also led to growing foreign exchange reserves, as well as to a record level of gold reserves that is unbeaten to date. A full 38,347 tonnes of gold were stored in central bank vaults around the globe . After the gold price was no longer linked to the US dollar, it temporarily lost significance as a foreign exchange reserve, and the global gold reserves decreased to 29,667 tonnes until 2007. The financial crisis caused central banks’ appetite for gold to resurge. Over the past ten years, global gold reserves have grown almost consistently, as the rising price of gold has also made the precious metal popular as a yield generator. Today, 35,196.9 tonnes are stored in central bank vaults across the globe.
Volume of gold reserves varies greatly internationally
Goldfinger was on the right track – an impressive 8133.5 tonnes are held by the US Federal Reserve, which is more than any other country on earth. Germany comes in second with 3362.4 tonnes, seemingly insignificant compared to the US and even more so set against the amount of privately owned gold in Germany, which is over 8,900 tonnes. Juxtaposed with most other countries, however, German gold reserves are quite respectable. According to the most recent statistics of the World Gold Council, 82 of the 100 countries with the highest gold reserves store less than 1,000 tonnes of gold in their vaults.
Just as the US and Germany have occupied the first two places of the countries with the highest gold reserves for many years, Italy and France have done the same with 2,451.8 and 2,436.2 tonnes, respectively, coming in third and fourth.
Newcomers occupy the current fifth and sixth places: in recent years, Russia and China have massively expanded their gold reserves, to 2,298.5 and 1,948.3 tonnes, respectively. Many other countries have much smaller gold holdings. For 29 of the 100 countries with the highest gold reserves, they are in the single-digit tonne range. A number of countries do entirely without gold reserves, such as Norway, Georgia, Israel, New Zealand and Canada.
Putting national gold reserves in perspective
To judge how important gold reserves are to a country, it is always important to look at its total foreign exchange reserves. Regarding the top four countries, however, the first impression proves to be correct. Not only do the US, Germany, Italy and France hold the highest gold reserves in absolute terms, their gold holdings also account for a large part of their total foreign exchange reserves, between 66 and 78 per cent.
The situation is different for Russia and, even more so, for China. While Russia’s gold reserves account for 23.7 per cent of its currency reserves, those of China make up only a meagre 3.5 per cent. Among the 100 states with the highest gold reserves, there are only five whose gold holdings contribute even less to their total foreign exchange reserves.
On the other hand, there are also countries whose low gold holdings account for the lion’s share of their total foreign exchange reserves, such as Cyprus with only 13.9 tonnes of gold accounting for 68 per cent of its foreign exchange reserves. The front-runner in this respect is undisputedly Venezuela, where 161.5 tonnes account for a full 83.5 per cent of the country’s total foreign exchange reserves.
Source of all data on gold reserves and their share in total currency reserves: World Gold Council, as at 5 February 2021