Commodity Online
The announcement in April from the Chinese State Administration of Foreign Exchange (SAFE) that China had increased its gold reserves by 454t, to 1,054t, has rekindled gold market hopes that China is to become a large purchaser of bullion.

The bullish case is quite simple. Gold is considered to be one of the main foreign assets held by countries, along with foreign exchange reserves and IMF balances, but its value in China.s reserves, even after the additional 454t, is less than 2%. This is lower than the optimum amount thought to offer diversification benefits, and what the developed countries have, and therefore China needs to (and will) buy substantially more gold. A similar argument is made for other forex-heavy but gold-light countries, such as Japan, South Korea and Singapore.

But this begs several key questions. What proportion of gold in international reserves is correct? Does that proportion vary between countries? And is that metric the right way in which to view it at all?

Gold’s share by value of global foreign exchange reserves is currently about 10%. This is not co-incidentally similar to what is often said to be the right amount of gold and just 5% lower than what the European Central Bank decided its gold holdings would be as a percentage of total reserves when it was formed, the only recent example of a central bank deciding on a gold share.

Gold’s share has declined sharply since the 1950s and 1960s, but has stabilised in the last decade, despite a huge increase in foreign exchange reserves. After the US dollar and the euro it is easily the third largest asset by value. And there would be enough gold to go around, even if every country wanted to have 10% of its foreign reserves in gold.

But this global average of 10% of reserves held in gold masks great differences in the shares held by individual central banks. The distribution of gold and foreign exchange reserves are both skewed, and in different ways. The top ten holders of gold, as shown in the table below, own 81% of the world’s official gold. In forex, the top 10 countries have by value 72% of global reserves. But only two countries, China and Russia, feature in both tables.

This means that, as a share of reserves by value, there is enormous variation, and indeed polarisation. Of the 133 countries listed in IMF data, 51 don.t have (or at least do not admit to having) any gold reserves. Of 82 who acknowledge having gold, only 29 have gold as a share of total reserves of between 5% and 20%; 36 have gold shares of between 0.01% and 5%; and 17 have shares higher than 20%.

The next table shows the countries with the highest and lowest percentage share of gold in their reserves. The highest are all European except the US, and with a percentage gold share ranging from 40% for Switzerland and Spain to 90% for Greece.

The countries in this table hold 64% of the world.s official gold. It is instructive to note that, with the exception of the US, Germany and Italy, they have all made major sales in the last ten years or so. The countries with the lowest share of gold in their reserves, ranging from 0% to 2%3, include large forex holders such as China, Japan, Korea, Hong Kong, Brazil and Singapore.

This group, with large forex reserves and small gold reserves, is seen by gold bulls as ripe for expanding gold reserves, to diversify their holdings and reduce their exposure to the US dollar. But of this group only China has added to its reserves in recent years.

Given this inconsistency, and the seeming reluctance of high forex/low gold countries to add to their reserves, it might be misleading to look only at measuring how much gold a country holds by taking into consideration its percentage of total foreign reserves.

For various reasons these two assets, gold and foreign exchange, might be considered incomparable (e.g. if those foreign 3 Three non-Asian developed countries make this list, Canada, which sold most of its gold off between 1982 and 2003, Norway, which sold its gold reserves in 2004, and Israel, which reports that it does not have any.

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