Gold reserves play an important role in a country's economic crisis, but
immediate selling of kilos of gold is difficult.
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| Gold vs currency |
How does gold reserves affect currency
There are a few reasons why a country with a huge amount of gold reserves
might still sell dollars to buy foreign currency or goods instead of trading
gold directly:
Liquidity, Gold is a relatively illiquid asset, meaning that it can be
difficult to sell quickly or at a fair price. Foreign currencies and goods are
much more liquid, making them easier to trade.
Transparency, Trading gold can be complex and opaque, making it difficult to
ensure that the country is getting a fair price and that the transaction is
not fraudulent. Trading foreign currencies and goods is much more transparent
and easier to audit.
Diversification, Holding a diversified portfolio of assets is a good way
to reduce risk. By holding both gold and foreign currencies, a country can
reduce its exposure to fluctuations in the value of either asset class.
International relations, Trading foreign currencies and goods is a way
to build and maintain relationships with other countries. This can be
important for a variety of reasons, such as promoting trade and investment,
and ensuring security cooperation.
In addition to these practical reasons, there are also some theoretical
reasons why a country might choose to hold some of its reserves in foreign
currencies instead of gold. For example, some economists believe that gold is
not a good long-term store of value because it does not generate any income.
They argue that it is better to hold assets that can generate income, such as
foreign currencies or bonds.
Of course, the decision of how much gold and foreign currency to hold in
reserves is a complex one that depends on a variety of factors, such as the
country's economic situation, its geopolitical environment, and its risk
tolerance.
Here are some specific examples of how countries have used their gold
reserves:
In 2011, Switzerland sold 256 tons of gold to raise money to support its currency, the Swiss franc.In 2013, Cyprus sold 13 tons of gold to raise money to help pay for its bailout by the European Union and the International Monetary Fund.In 2016, the United Kingdom sold 395 tons of gold to raise money to reduce its national debt.
In all of these cases, the countries could have traded their gold directly
with other currencies or goods. However, they chose to sell dollars instead
because it was more convenient, more transparent, and less risky.