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Advantages and Disadvantages of the Holding of Gold Reserves by Central Banks - With Special Reference to the Swiss National Bank

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  • Peter Bernholz

Abstract

It is advantageous for a country like Switzerland to hold part of its central bank reserves in gold, even given a discretionary monetary regime with flexible exchange rates. This in spite of the fact, that the return on gold reserves is usually lower than that on foreign exchange reserves. Reasons are first, the greater security of gold reserves kept at home. For foreign exchange reserves are claims against foreign banks and authorities, which can be blocked any time for political reason. Second, short and especially long-term movements of exchange rates are often more important than that of the gold price. Finally, the selling of gold reserves in favor of political authorities or purposes implies political struggle for the distribution of the proceeds as witnessed by recent events in Switzerland. Finally, in comparing the return on gold and foreign exchange reserves not only the respective nominal returns, but also the long-term development of the prices of gold and the respective foreign currencies have to be taken into account. For whereas the price of gold in Swiss francs has risen substantially, the price of the US dollar has fallen heavily since 1968.

Suggested Citation

  • Peter Bernholz, 2002. "Advantages and Disadvantages of the Holding of Gold Reserves by Central Banks - With Special Reference to the Swiss National Bank," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(II), pages 99-113, June.
  • Handle: RePEc:ses:arsjes:2002-ii-1
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    File URL: http://www.sjes.ch/papers/2002-II-1.pdf
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    References listed on IDEAS

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    1. Bernholz, Peter & Gartner, Manfred & Heri, Erwin W., 1985. "Historical experiences with flexible exchange rates : A simulation of common qualitative characteristics," Journal of International Economics, Elsevier, vol. 19(1-2), pages 21-45, August.
    2. Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2001. " Central Bank Independence: An Update of Theory and Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(1), pages 3-40, February.
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    Cited by:

    1. Ghosh, Amit, 2016. "What drives gold demand in central bank's foreign exchange reserve portfolio?," Finance Research Letters, Elsevier, vol. 17(C), pages 146-150.

    More about this item

    Keywords

    Swiss National Bank; gold reserves; monetary regimes;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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