Global risk and demand for gold by central banks

ABSTRACT

This article examines the influence of global risk on the holding of gold by central banks based on annual data for 100 countries during 1990–2015. We use a dynamic panel generalized method of moments model to estimate this effect, controlling for a variety of domestic factors. Consistent with portfolio diversification and perception of gold as a safe asset, we find that the gold holdings of central banks increase in response to higher global risk. This effect varies based on the levels of capital account openness, reserve adequacy, income status and currency regimes. These findings suggest that central banks adjust their gold holdings in response to changes in global risk conditions, with the magnitude of response depending on country-specific vulnerabilities.

KEYWORDS:

• Gold
• central banks
• global risk diversification
• capital account openness
• flight to quality
• safe haven

JEL CLASSIFICATION:

• G11
• F31
• F33

Acknowledgement

We thank Arvind Sahay and an anonymous referee for their useful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Ghosh (2016b) considers determinants of central bank gold holdings across countries but does not consider global risk which is the primary focus of our work.

² Results for ordinary least squares-fixed effects (OLS-FE) model indicate that the relationship between lagged VIX and GTR is significant and the direction is consistent with the baseline result.

³ The exchange rate regime in 2010 (the latest available data) is extrapolated to the subsequent years.

⁴ The baseline results were tested using the bias corrected Least Squared Dummy Variables specification as well as Difference GMM, and these were consistent with the baseline results.

⁵ Cumulative US dollar claims of central banks accessed from the IMF COFER database. Aggregate data are available from 1995 onwards. Country-specific data are confidential.

⁶ Indicator published by the European Central Bank. Data are available since 1999 and can be accessed through http://sdw.ecb.europa.eu/quickview.do;jsessionid=59345549E5A3C5AACB51A55BB240377A?SERIES_KEY=280.RDF.D.U2.Z0Z.4F.EC.U2_GRAI.HST.