What are Gold Reserves?

Published by Thomas Herold in Economics, Investments, Trading

'Gold Reserves' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Gold Reserves are the amount of gold which nations and some international organizations hold to secure the value of their currency or to give credibility to their central bank policies. They are also utilized as a method of making international payments to other nations in order to settle outstanding bills and claims.

Such reserves (as a percentage of total reserves) that countries maintain were far larger from the 1700s through outbreak of World War I. This was because of the successful and stable policy of the gold standard that countries such as Great Britain and its empire pioneered throughout the globe.

For thousands of years, gold has been a means of exchange to one degree or another for empires, kingdoms, and nations around the world. During most of the time from the 1600s to 1900s, gold became even more critically important even after paper currency arose. This gold backed up the value of the paper money and could be exchanged for paper currency. Paper money served as legitimate claims on the gold reserves of the central banks of important nations for hundreds of years. International trade was settled in gold.

This helps to explain why countries had to build up and inventory a large supply of gold reserves. This was not only for economic reasons, but also for political ones. The larger a nation’s reserves proved to be, the greater their economic strength was regarded. This was an internationally accepted standard at least until the beginning of the First World War. In those difficult years, many nations abandoned their gold standards because they could no longer afford to maintain them and simultaneously pay for the skyrocketing costs of the devastating global “Great War.”

Nowadays no modern governments demand that all of their money be backed up by their gold reserves. Switzerland alone requires as much as 25 percent of their Swiss francs to be backed by equivalent gold holdings in their reserves. Despite this fact, most governments of the world still keep enormous quantities of the yellow metal as a protection against economic disaster, world financial crises, or the outbreak of hyperinflation. Most years, governments collectively boost their reserves by literally hundreds of tons. Canada is almost unique in that it has chosen to totally liquidate its reserves of the precious metal.

Gold remains the most widely watched and heavily traded world wide commodity, per a Futures magazine report in 2013. This is in part because non-government groups such as individuals, investors, and businesses recognize that gold is the ideal hedge against inflationary outbreaks or global and national recession. National gold reserves are always described in numbers of metric tons.

Though its stocks are no longer what they once were as a percentage of global gold holdings, the United States owns the biggest single stock pile of gold reserves on earth with a considerable lead on the second biggest holder. The U.S. holdings still amount to about the equivalent of the next three biggest national holders combined. The other countries in the top five nation holders are Germany, Italy, France, and China. The International Monetary Fund claims to have more gold holdings than Italy yet less than those Germany owns.

Per 2014, the national gold holdings were broken down accordingly. The United States owned 8,133.5 tons. Under the system of the Breton Woods international currency exchange mechanism, the U.S. stored somewhere between 90 percent and 95 percent of all global gold reserves in American-based vaults. Germany had 3,387.1 tons in 2014. Italy maintained 2,451.8 tons. France owned 2,435.4 tons. China held 1,054.1 tons officially, though the majority of analysts concur that the Chinese massively under-report their true gold holdings. This is likely to be the case as China is the world’s largest gold miner. It allows them to add gold quietly to their reserves without having to make purchases on the international gold markets.

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The term 'Gold Reserves' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.