Central banks deep in gold

CENTRAL banks bought more gold in 2018 than at any time since the early 1970s – and the trend has continued this year, writes Isabelle Strauss-Kahn, who is a member of the advisory board of the World Gold Council.
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Isabelle Strauss-Kahn

Staff Reporter

In the 1990s, gold was an unloved asset among central banks. Reserve managers lent or sold their gold, particularly in Europe, and the gold price fell to a low of $250 per ounce.
Years of persistent selling triggered the Central Bank Gold Agreement of 1999, under which signatories agreed to limit collective sales to 400 tonnes per annum, put a cap on gold leasing and take a disciplined approach to gold futures and options. 
The agreement delivered two clear benefits: it helped to stabilise the gold price and increased transparency around central bank gold sales. Today, however, sentiment towards gold has been transformed and gold has regained its status as a valuable and highly regarded reserve asset.
All these uncertainties accentuate negative market sentiment and drive central bank investors to reallocate their portfolios away from risky assets to safe haven assets.
This is where gold comes into its own, as it fulfils central banks' three core objectives: safety, liquidity and return.
Gold is well known as a safe haven asset. It carries no credit risk, has little or no correlation with other assets and the price generally increases in times of stress. As such, it offers valuable protection in times of crisis. 
Gold is highly liquid too. It can easily be traded in global market centres, such as London and New York. It can be used in swap transactions to raise liquidity when needed and it can be actively managed by reserve managers.
Gold can also enhance the risk/return profile of a central bank portfolio. Its lack of correlation to other major reserve assets makes it an effective portfolio diversifier and, over the long term, it delivers higher returns than many other assets. 
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