The changing role of gold
Mon Nov 23 2020
Throughout history, gold has played an important
role in both its actual and symbolic value. For many ancient civilisations,
such as the Incas and Egyptians, gold ownership was limited to members of the
royal families, as only they had access to the gods.
Over time, the role of gold changed so that, by the
end of the 19th century, many countries fixed the value of their currencies in
terms of a specified amount of gold – this later became known as the gold
standard. After World War II, countries adopted the Bretton Woods system of
monetary management – a regime of fixed exchange rates linked to the price of
gold.
But, while the role of gold has changed within the
monetary system, it remains important for investors.
This year, the Covid-19 pandemic and the reaction
from central banks had a significant impact on the price of gold. Over the past
few decades, central banks have viewed gold as a ‘safe-haven asset’ – an
investment that can be used to dodge the impact of negative sovereign bond
yields and act as a safeguard against inflation.
Against the backdrop of the pandemic, gold has
rarely appeared more attractive. However, in August, central banks became net
gold sellers for the first time in approximately 18 months, highlighting the
competing demands on investment strategies.
This year’s survey revealed central banks expect
gold holdings to increase over the next 12 months. Around 75% of respondents
reported that the Covid-19 outbreak would not change how their institutions
viewed gold, with many noting the commodity was an elemental part of their
portfolios.
Diversification appears to be the biggest driver of
central banks’ interest in gold. In real and nominal terms, it has outperformed
many other assets in all macroeconomic regimes that have prevailed since the
end of Bretton Woods.
More recently, asset managers have begun offering
gold investments in the form of exchange-traded funds (ETFs). The survey
revealed that, while central banks are positively disposed towards gold ETFs,
active interest is the preserve of the minority. Respondents noted that a
combination of gold’s quality as a hedge against the US dollar and ETFs’
cost-effectiveness were the main benefits of investing in gold in this way.
However, many were concerned with the liquidity risk associated with ETFs.
As this report affirms, 2020 has been a challenging
year for gold investors – only time will tell what role it will take as we
recover from the pandemic.
Source: https://www.centralbanking.com/