Buy Gold As “Extremely Low-Risk Asset” – Rogoff Advises Creditor Nations

Buy gold as it is an “extremely low-risk asset” is the advice of Professor Kenneth Rogoff to emerging market, creditor nation central banks including the People’s Bank of China (PBOC).

Rogoff believes that there is a good case to be made that emerging market central banks, such as the People’s Bank of China who have over $3.3 trillion in foreign exchange reserves, accumulate gold as this would “help the international financial system function more smoothly and benefit everyone.”

Russian central bank bought another  500,000 troy ounces of gold in April (ShareLynx)

Writing in Project Syndicate Rogoff notes that:

“Moreover, there is a case to be made that gold is an extremely low-risk asset with average real returns comparable to very short-term debt. And, because gold is a highly liquid asset – a key criterion for a reserve asset – central banks can afford to look past its short-term volatility to longer-run average returns.”

Rogoff notes that creditor nation central banks have been accumulating gold already but at a snail’s pace:

“Emerging markets have remained buyers of gold, but at a snail’s pace compared to their voracious appetite for US Treasury bonds and other rich-country debt. As of March 2016, China held just over 2% of its reserves in gold, and the share for India was 5%. Russia is really the only major emerging market to increase its gold purchases significantly, in no small part due to Western sanctions, with holdings now amounting to almost 15% of reserves.”

The latest data from Russia over the weekend shows that the Russian central bank bought another 500,000 troy ounces of gold in April.

Russia and China continue to be the largest sovereign buyers of gold today and central bank demand remained robust in the first quarter of the year – central banks purchased 109 metric tonnes. This represents the 21st consecutive quarter that central banks have been net purchasers of gold as they continue to diversify their huge exchange reserves and significant US dollar exposures.

Despite the steady buying, most creditor nations still hold less than 10% of their reserves in gold compared to 60% to 100% in large debtor nations such as the US, Greece, Italy, France and others.

Source Wikipedia 

Other emerging market creditor nation central banks with large foreign exchange reserves include Saudi Arabia, India, Brazil, Mexico, Thailand, Algeria, Iran, Turkey, Indonesia, Malaysia and United Arab Emirates (UAE).

The article by Rogoff is an important one and yet, like many recent significant developments in the gold market, it got surprisingly little mainstream media coverage.

It is another sign that gold is being re-monetised in the global financial and monetary system.

It also bodes well for gold’s outlook as the massive scale of international foreign exchange reserves means that even a small allocation into the small physical gold market by creditor nation central banks should see gold reset to much higher levels in all currencies. This may be why Professor Rogoff says regarding gold that “there is no limit to its price.”

Rogoff is a thought leader and a leading voice of western central banks. He was the chief economist of the International Monetary Fund from 2001 to 2003 and is the Professor of Economics and Public Policy at Harvard University.