Central Banks Prefer Gold & Other Assets Over Dollar & Euro- WGC

The central banks are reducing allocations to US dollars and euros and are shifting to purchases of traditional assets such as gold and Japanese yen and new alternatives including Chinese renminbi a report from the World Gold Council said Wednesday.
The official reserves of global central banks have grown from $2 trillion in 2000 to more than $12 trillion in 2012. During this same twelve-year period the data shows significant shifts away from the US dollar while the share of “other” currencies in reserve composition has tripled in absolute terms since 2008.
In line with this trend, central bank gold buying in the fourth quarter of 2012 marked the eighth consecutive quarter of net purchases by the official sector and the highest level since 1964.
Central banks became net buyers of gold in 2010 after two decades of being sellers, according to the WGC. This was a reaction to the sovereign debt crises threatening traditional reserve currencies such as the dollar and the euro, the report said. Stimulus programs such as quantitative easing in the U.S. have also heightened fears of inflation and currency debasement, which encouraged central banks to turn to gold as a store of value and hedge against these risks.
Russia, which has been a regular buyer of gold in recent years, added 391,000 ounces to its inventory bringing the official reserves up to 31.2 million ounces. The Bank of Korea increased its gold reserves by $1.03 billion to $4.79 billion in February, equivalent to about 1.5% of its foreign exchange holdings, and raising its exposure to the precious metal by almost a quarter in tonnage terms and nearly a third in value terms.
“Gold has a deep and liquid market with no credit risk, making it one of the most attractive assets for central banks to consider as they diversify away from the US dollar and euro. Gold’s tail-risk hedging properties add to its appeal as a particularly valuable component of a diversified reserve portfolio.” Said Ashish Bhatia, Manager for Government Affairs at the World Gold Council.
The study is predicated on the assumption that central banks will continue to hold 65% of their assets in dollars and euros, while looking for high quality alternatives including Chinese, Canadian, Australian, Swiss, and Danish denominated assets for the balance of their reserves. It quantifies the benefits of these alternatives using portfolio optimisation methodology and examines their diversification benefits while providing context for potential limits to their use due to limited availability or access.
However, it concluded that gold is one of the most attractive alternatives due to its lack of credit risk and deep liquid market. The large size of the gold market, approximately $3.2 trillion, means that central banks have sufficient access to gold for big investments, the WGC said in the report. It estimated the average daily trading volume in the gold market at $240 billion.

Source by Commodity Insights