To many people, gold is a form of currency that’s seen as more historic, rather than something that is used in the world now. Whilst there are a few ‘gold’ coins in modern UK currency, they’re actually nickel-brass or nickel-plated alloy rather than solid gold. And no one is stocking a family safe with gold bars – our investments are now just a number on a screen, rather than a physical hoard of precious metals.
However, that’s not necessarily the case on a national scale. Countries around the world still have gold reserves tucked away in secure vaults, with the gold in the form of bullion bars or coins. These reserves act as a backup to paper money, and have done so since the 1870s, when they were brought in to stabilise international trade prices.
But why are they still important today? In this post, we explain why gold reserves still exist.
Stability in times of change
The turbulence of the last few years has seen spikes and dips in our economy, meaning that investors can’t guarantee that they’ll get a return on their investment. As inflation rises, the value of the pound falls, as a result of reduced buying power. However, gold does the opposite – it acts as a hedge against inflation, with the value of gold rising. This is because the amount of gold in the world is finite, so it will always be valuable in contrast to paper currency. In bad times, banks are forced to print more money, but they can’t create more gold.
Investors also drive this price increase because they believe that gold will hold its value, so they buy more of it, meaning that it’s in demand. This in turn increases the price, meaning that countries with gold reserves find they have more money in the bank than before without doing anything.
Diversification of investments
It’s important for investors not to put all their eggs in one basket – that is, to make sure that their portfolio is diversified, to reduce risk. Not every investment acts the same, so this protects against one type crashing (and therefore resulting in losses) or being slow to grow. The same principle applies to a country’s wealth, with governments seeking to keep investment returns stable or increasing to make them more predictable.
Countries invest in gold as a form of diversification for their portfolios. As we’ve mentioned, gold is a particularly effective hedge against inflation, meaning that whilst stocks and shares may tumble, there will still be at least one form of investment that’s increasing during times of economic turmoil.
Who holds the most gold?
Many countries around the world will employ this investment strategy, but who holds the most gold? The top three contenders are:
- USA. This nation holds around 8,113 tonnes of gold, meaning that it’s got more than double the next country on the list – fitting for the world’s largest economy.
- Germany. The second-largest reserve comes in at 3,355 tonnes – 74.5% of Germany’s foreign reserves.
- Italy. With 2,452 tonnes of gold sitting primarily in the Bank of Italy in Rome, Italy remains high on the world list regardless of a somewhat unstable economy.
Long-term value
Despite seeming somewhat antiquated, gold remains an important part of the world’s economy. Its value as an inflation hedge and long-term investment means that it’s likely to be part of our financial system for a while longer.
