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Gold and central bank reserve management during the COVID-19 pandemic

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Global Mining Review,

Central bank reserves are typically constructed according to three guiding principles: safety, liquidity and return. The COIVD-19 pandemic has reinforced the significance of these principles and, by extension, the importance of smart and sustainable reserve management.

But, in order to deliver effectively against this mandate, central bank reserve managers need to understand how different assets perform during stress periods. Only in this way, can they develop portfolios that are robust and resilient in the face of market stress, while aligning with the three core principles of reserve management.

Looking back over recent weeks, financial markets have deteriorated at an almost unprecedented rate and central banks have been forced to deploy their reserves to ensure both currency stability and financial system liquidity.

Traditionally, assets such as US Treasuries and G-10 sovereign bonds comprise the bulk of central bank reserve portfolios. But gold is widely held too, with one of the main reasons being that it tends to outperform other assets during periods of market stress.

Indeed, gold has generated strong returns in 2020, increasing in value by 10.91% from 1 January to 17 April. Some central banks have already put their gold into action: the Banco Central del Ecuador, for example, swapped US$300 million of its gold holdings to raise liquidity in March.

However, while nearly every central bank holds some gold, the majority maintain a relatively low allocation, particularly those from emerging economies. Recent market behaviour prompts a re-examination of gold’s role compared to other traditional reserve assets.

To gain a better understanding of gold’s role as a core central bank asset, the World Gold Council has reviewed gold’s performance as a reserve asset during the recent financial strife. It has also assessed how different gold allocations would have affected the performance of total reserves in this crisis period.

The analysis reveals that a typical central bank total reserve portfolio would have performed better with higher allocations to gold.

Reserve asset behaviour during the COVID-19 pandemic

Risk assets have moved rapidly out of favour in recent weeks. As the COVID-19 pandemic has prompted a widespread reassessment of global economic prospects, investors have rotated into safe-haven assets, including gold.

Some haven assets have delivered better returns than others, however. And gold has been one of the best performing safe-haven assets for 2020. Between 1 January and 17 April 2020, gold outperformed US treasury bonds and bills, USD-denominated investment grade agency and corporate debt, and Eurozone sovereign bonds.

There have, however, been times when the gold price fell in recent months, especially during heavy risk-off sessions. This has prompted concerns about gold’s haven status: it is supposed to move in the opposite direction from risk so why did it lose ground as financial market turmoil intensified?

Such behaviour may seem counterintuitive, but it is not without precedent. During the darkest days of the 2008 financial crisis, gold also declined alongside risk assets on sharp sell-off days. The key to this phenomenon lies in gold’s liquidity. As investors faced margin calls and needed urgently to raise cash for redemptions, liquid assets such as gold were first in line to be sold. US Treasuries also fell victim to this trend, selling off alongside equities and gold on some of the sharpest risk-off days. Ultimately, however, gold was one of the few asset classes to deliver positive results that year. Based on the LBMA gold price, gold generated an annual return of 4.3% in 2008 to end the year at US$869.75 year per oz.

This outperformance underlines gold’s long history of resilience in times of turmoil. During the past 3 decades, gold has outperformed risk assets in nearly every single major market downturn. And that outperformance has continued during the COVID-19 pandemic, reinforcing gold’s role as a counter-cyclical asset during periods of market stress.

Analysis of a hypothetical central bank total reserve portfolio during the current crisis

Given gold’s impressive performance during the COVID-19 outbreak, it would seem timely to review how gold can affect the returns generated by a total reserve portfolio. According to the 2019 World Gold Council Survey on Gold Reserve Management, 91% of central banks manage gold separately from their other reserve assets. It has therefore evaluated gold’s impact on total reserve asset performance rather than focusing on a specific tranche or a single currency portfolio.

The gold council’s analysis considers three hypothetical total reserve portfolios – one with no allocation to gold, one with a 5% allocation and one with a 10% allocation. The no-gold portfolio was constructed based on the latest currency weightings from IMF COFER data. Specific asset classes and instrument allocations were selected to replicate a typical emerging market reserve portfolio. The two test portfolios included 5% and 10% allocations to gold, while proportionally decreasing the weightings of the other portfolio components. The analysis reflects the period from 1 January to 17 April 2020, including the initial reports of the virus in Wuhan, China’s nationwide lockdown, the sharp financial reaction, and the subsequent global spread of COVID-19. It has focused on emerging market central banks, as they tend to maintain a relatively low exposure to gold.

The results of the analysis are illuminating. They show that both hypothetical test portfolios outperformed the base portfolio with no gold allocation. The base portfolio – with no allocation to gold - produced a return of 1.07%. The hypothetical test portfolio with a 5% gold allocation returned 1.53%. And the hypothetical test portfolio with a 10% gold allocation returned 2.00% over the analysis period.

A higher allocation to gold did introduce more volatility to the test portfolios, but the Sharpe ratios of both hypothetical test portfolios were improved with the addition of gold. The base portfolio sported a Sharpe ratio of 0.96, while the Sharpe ratio was 1.19 for the hypothetical test portfolio with a 5% gold allocation, rising to 1.33 for the hypothetical test portfolio with a 10% gold allocation.

The World Gold Council’s analysis shows that total reserve portfolios with higher gold allocations would have outperformed a hypothetical central bank total reserve portfolio with no gold during the recent COVID-19 crisis period.


The economic, social and financial fallout from the COVID-19 pandemic will almost certainly continue for a prolonged period. It is impossible to predict the exact course that financial markets will take as the pandemic continues, but gold has certainly reacted in a predictable way to date – preserving value and providing financial safety as risk assets sell off. During this crisis period, a typical central bank total reserve portfolio would have performed better with higher allocations to gold than a portfolio without gold, preserving more financial firepower to support currency stability and market liquidity.

Central bank reserve managers are already aware of gold’s strategic value and resilience. Its performance in recent times highlights the benefits of these attributes. Looking ahead, the financial turmoil unleashed by COVID-19 is yet another test of reserve managers’ ability to strike the right balance between safety, liquidity and return in their portfolios. Now, as in previous crises, gold remains an indispensable central bank reserve asset.

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