Gold Forecaster - Global Watch
What percentage should Gold in Foreign Exchange Reserves be?

Julian D.W. Phillips
March 18, 2006

Excerpts from "Gold Forecaster - Global Watch."

We have heard the opinion that "Given that over 50% of the Bundesbank's foreign reserves are in gold (valued at market prices), there is a case for reserve diversification. Studies show that some gold in the portfolio does improve risk adjusted returns but the current holdings of the Bundesbank are excessive for this purpose". We respect this opinion and see it as the present way of assessing gold in portfolios, even of Central Banks. But we also note the proviso in this statement, "...for this purpose."

The European Central Bank has set as the level of gold 15% of its reserves to back the Euro. Such a level surely is based on a generally sound monetary future, with gold balancing some heavy must easily manageable swings in the value of those reserves, by far the greater bulk of which are the U.S.$. However, Germany [3427.8 tonnes - 52.4%], Italy [2451.8 tonnes -59.4%] and France [2856.8 tonnes - 59.5%] hold far greater quantities of gold than 15%, closer to 60% still.

Why, by their actions, do they disagree with the E.C.B. and the commentary made? Why indeed does the U.S. hold by far the greater bulk of its reserves in gold [8133.5 tonnes - 67.5%] still? They have to disagree with the basis on which the E.C.B. works out the preferred percentage of gold in those reserves.

Politicians may well see gold as a piggy bank which can be raided if some inadequacy in their financial management is shown up, and a short-term dip into savings is easy. Germany has been dipping into savings at an alarming rate in the last decade, privatizing the country's properties as fast as they can. [Since 1995, 60 billion euros ($72 billion) worth has been sold.]. Fortunately the country's bankers are a deal thriftier. Indeed Axel Weber the Bundesbank President has made it clear he is not a seller of Germany's gold, and made it clear to government that it's their right to manage its gold lies with the Bundesbank alone!

So why the fierce protection of Germany's gold? This may seem a value judgement belonging to the past, but gold, when currencies do fail, act as a life-blood to a nation and knowing they are there shores up confidence. Confidence in a currency? But Germany no longer has a currency of its own it has the Euro, one may say.

One only has to open one or two pages of a large volume on the past to realise that currencies have a poor history and it is infinitely wise to protect against the worst possible eventuality. Why should Germans or Italians or the French throw caution to the wind and depend on the gold reserves of the E.C.B.? Why should they increase the proportion of their savings in the U.S.$ when they have known since the war, the over-issuance of that currency. Why should they invest their savings in their own currencies when the purpose of gold is to protect against an adverse future for that currency? Clearly the consensus opinion of the largest economies in the world, [by their actions] believe gold should form more than half their reserves! So we do well to try to translate these actions into the realities of reserve management. As if to corroborate this view we see both China and Russia belatedly aiming to increase their gold reserves.

March 17, 2006
-Julian D.W. Phillips
email: gold-authenticmoney@iafrica.com

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