[OPE-L] why do central banks still hold gold reserves?

From: Gerald_A_Levy@MSN.COM
Date: Sun Dec 05 2004 - 08:22:41 EST

Claus asked Michael H:

> Who forces central banks and private capitalists to take
> and hold gold?

Answer:  central banks are not "forced" to take and hold
gold.  It is an option that they have taken for a variety
of practical and historically contingent reasons -- none of
which should be seen as evidence that gold remains the
money commodity.

The reasons 'usually' given are itemized by Harald Badinger
& Barbara Dutzler (2002) "Excess Reserves in the Eurosystem:
An Economic and Legal Analysis" (IEF Working Paper #44; 95
pages): http://fgr.wu-wien.ac.at/institut/ef/wp/WP44.pdf

   "* 'reserve asset of last resort': gold is the only 'country-
        independent' means of payment; its use cannot be
        restricted by the decision of any authority.

    * diversification of the reserve portfolio: usually
       the value of gold increases during financial crisis and
      uncertainty, while other assets (like stocks) usually
      move in the opposite direction; this negative correlation
      makes gold a valuable instrument for diversification.

   *  psychological element: countries with high gold
      holdings appear as creditworthy and this should also
      strengthen the currency of a nation." (p. 20)

_None_ of these reasons are *essential*  to the operation of
the capitalist monetary system.  I.e. capitalist relations would
continue to be reproduced without central banks holding
gold for the above purposes.

None of these reasons constitute evidence, imo, that gold is now the
money commodity or that gold must be the money commodity.

The first reason ('reserve asset of last resort') is related to national
sovereignty and nationalism.  I.e. by holding gold reserves,
central banks diminish their vulnerabilities arising from the
monetary and _political_ policies of other nation states. In
any event,  if/when gold is used in this way -- as an *asset* --
it is simply being used as a _commodity_ which is exchanged
_for_  other commodities _or_  money.  That is, it does not necessarily
become money.   Rather, it could be seen more as a kind of
'insurance policy' in which gold could be defensively employed
by a nation state if attacked with currencies by other nation states.
Or, more commonly, as a kind of "deterrent" to such attacks.  (Note
that in order to further comprehend these relations, one must grasp
the role of the state, foreign trade, and world markets. That is, it can
not be simply understood at the level of  abstraction of  "capital in

The second reason (diversification of the reserve portfolio) is
interesting _but_ a desire for diversification -- in order to spread
risk -- is hardly limited to central banks and gold.  Diversification
is a general tendency that arises alongside the processes of
the concentration and centralization of capital.  There are basically
the same benefits of diversification for industrial capital and
banking capital.  There are also other commodities, which like gold
are not money, that exhibit the same characteristics: e.g. diamonds,
rare objects like art by famous artists, etc.  It can not be seen as
evidence that gold is the money commodity.

The third reason (psychological) is also interesting since
it recognizes that regardless of what the actual role of gold
is within the capitalist system,  gold fetishism and ancient
cultural beliefs about gold can influence central bank
policy.  Holding gold could thus be seen to be a kind of
placebo for investors by central banks.  It, like a pacifier or
thumb-sucking, offers a psychological comfort to some investors
and thereby encourages positive expectations. Since gold had
been universally accepted as the money commodity in the
preceding historical period, this was a way of 'weaning'
investors off of gold.

As interesting as all of this is, none of it can be seen as evidence
that gold is the money commodity.

In solidarity, Jerry

This archive was generated by hypermail 2.1.5 : Mon Dec 06 2004 - 00:00:00 EST