Covid-19 confirms gold is vital for central bank reserves

Central banks choose the assets as the part of their reserves, based on security, liquidity, and returns. The crisis caused by Covid-19 has created an unprecedented deterioration in financial markets. Furthermore, it has confirmed the vital role of gold in central bank reserves.

The report by the World Gold Council highlights the importance of the precious metal for the sector during the coronavirus pandemic.

According to the report, assets such as Treasury bonds or G-10 sovereign bonds, represent the majority of the portfolios of central bank reserves. But gold is also very present since it improves the performance of other assets in market stress situations.

Indeed, according to the World Gold Council, the precious metal has generated significant returns so far this year. It increased its value by 10.91% between January 1 and April 17.

The world gold council studied the weight of gold on central bank reserves

The report warns that, although practically all central banks have gold, most of them, especially emerging economies, only have a small portion. The recent behaviour of the market encourages a reevaluation of the role of gold compared to other traditional reserve assets.

The World Gold Council has evaluated how different percentages of gold would have affected the reevaluation of central bank reserves in the crisis.

To carry out this analysis, they have established three types of central bank reserve portfolios: one without gold, another with 5% and the third with 10%. The period analyzed runs from January 1 to April 17. It includes events such as the initial reports of the coronavirus, the national closure of China, the economic reaction and the subsequent spread of the virus around the world.

The study’s conclusions are clear: the reserve portfolio that did not include gold increased by 1.07%; the one that had 5% gold rose 1.53%; and that of 10% gold, by 2.00%.

Furthermore, it has been verified that the introduction of gold scarcely altered the volatility variables in the reserve portfolios.

The economic, social and financial crisis stemming from the Covid-19 pandemic is going to continue for a long period. It is impossible to predict the exact path that the financial markets will follow during this period. Still, the truth is that gold has reacted predictably up to now. It is preserving its value and providing economic stability amid the rest of the assets crisis. Now, as in previous crises, gold continues to be an indispensable reserve asset for central banks, the report affirms.