Dirk G. Baur — Central Banks and Gold

Abstract:

Central banks hold gold reserves that are designed to build confidence in fiat currency. This confidence is undermined if the price of gold falls significantly or rises significantly. Central banks thus have an incentive to manage the price of gold. Such management is evident in fixed gold prices in the early 20th century, in Central Bank Gold Agreements more recently and in the asymmetric correlation between monthly central bank gold reserve changes and gold price changes. The empirical analysis further analyzes gold lending by central banks, linkages between central banks, bullion banks and mining companies and the gold carry trade. We conclude that coordinated and shadowy gold operations by central banks are necessary for successful gold price and gold reserves management and demonstrate the power of market forces relative to central banks.

The world may not be on the gold standard any longer, but gold is still very much in the picture as far as central banks are concerned.

Gold remains the numeraire. Many people compare valuation relative to gold and historical standards.

Central banks manage gold price as a matter of maintaining confidence.

SSRN
Central Banks and Gold
Dirk G. Baur, University of Western Australia - Business School;