Modern countries may have moved off the gold standard a long time ago, but many central banks still hold significant gold reserves. Central banks have been adding millions of tons of gold each year to bolster their reserves.
This begs the question: If currencies aren’t backed by gold anymore, why are central banks still buying non-yielding gold when they could be holding foreign bonds that pay regular interest and cost nothing to store?
- The U.S. holds the most gold reserves of any country in the world, followed by Germany.
- Gold is not tied to any currency, but most countries keep it as insurance against a currency crisis.
- Gold is always worth something, and is accepted anywhere around the world.
The Largest Gold Reserves
The United States holds the largest gold reserve at more than 8,000 metric tons, twice that of the next leading country, Germany, and three times that of Italy and France. If valued at a conservative $1,800, these reserves are theoretically worth more than $480 billion U.S. dollars.
These reserves were a significant portion of the country’s roughly $850 billion monetary base in August 2008, but since then, it has become a smaller portion of the approximately $5.8 trillion monetary base in 2021.
These gold reserves accounted for about $11 billion (7.2%) of the Federal Reserve’s holdings as of September 2020, which means that it seems to prefer gold over a basket of currencies and foreign sovereign debt like many other countries.
By comparison, China holds less than 4% of its reserve holdings in gold and a majority in U.S. government bonds that it acquires through a long-running trade deficit amounting to trillions of dollars.
China ranks relatively low on the list of gold reserves, but it is mining more new gold than any other country.
While the U.S. holds the largest gold reserves, other countries are adding to theirs at a faster rate or have access to domestic gold sources.
For example, Australia only has 280 metric tons of gold in its reserves. However, it houses the largest gold mine reserves in the world and has the third-largest gold producer. The countries with the largest gold reserves include:
- United States: 8,134
- Germany: 3,364
- Italy: 2,452
- France: 2,436
- Russia: 2,300
- China: 1,948
- Switzerland: 1,040
* Amounts in metric tons
The International Monetary Fund (IMF) also holds 2,814 metric tons of gold, while the European Central Bank (ECB) holds about 508 metric tons in its reserves. Several countries contribute gold to these organizations to support their value and ensure their stability during uncertain times.
Why Keep Gold Reserves?
Many developed countries maintain at least some gold reserves as part of their central bank policy, despite the high cost of storage and the lack of a financial return. After all, central banks could hold foreign sovereign debt and earn interest each year on those holdings.
Gold is an intrinsic currency that’s accepted anywhere in the world without a third-party guarantee. In other words, U.S. dollars must be guaranteed by the United States government to be worth anything, whereas gold is theoretically always worth something anywhere, anytime.
Central banks hold gold reserves as an insurance policy against hyperinflation or other severe economic catastrophes.
Gold is the most widely followed and traded commodity on Earth, making it a relatively liquid market if interventions were needed to support a fiat currency.
For example, if the U.S. dollar were to dramatically decline in value relative to other currencies, the government could sell gold to buy dollars and support its value.
As fiat currency inflation rises, many of these central banks increase their gold holdings over time to account for the increase in inflation. Some countries have also started to increase their gold holdings in response to the global economic crisis in a bid to make their currency more reliable than competing currencies. After all, the U.S. maintains such large reserves to support the value of the U.S. dollar as the world’s primary reserve currency.
The Bottom Line
Modern countries may have moved off the gold standard, but most central banks still hold gold reserves. The simple reason is that gold is the most widely accepted currency-like device that requires no third-party guarantee and is accepted anywhere.
It also serves as a critical failsafe in a significant financial catastrophe and helps support the intrinsic value of currencies by setting a floor for their valuation by global markets.