Which Country has the Most Gold Reserves?
By Rich Smith | April 30, 2018
It’s been nearly five decades since President Richard Nixon yanked the U.S. Dollar off of the “gold standard,” the system under which the value of a dollar was defined in terms of the gold it could buy. And yet, 45 years after the feds made that official, America’s central bank still has the most gold reserves on the planet.
Official gold holdings at the Federal Reserve — America’s “independent central bank” — currently tip the scales at more than 8,133 tons of gold, or nearly as much gold as is held by the central banks of the countries with the next three largest gold reserves, combined. At the latest official pricing for gold, which is roughly $1,354 per ounce, or $43.5 million per ton, the Federal Reserve’s hoard of gold is worth some $353.8 billion. And, if you’re wondering why the Federal Reserve holds gold at all, it does so as the repository of the U.S. government’s gold assets and acts as one of many forms of currency our central bank holds to facilitate payments to other countries — of which gold is arguably the most liquid. Gold is also used as a tool of monetary policy to strengthen or weaken the value of the Dollar as the government deems appropriate.
The top 20
Need more context? The London-based World Gold Council calls itself the “market development organization for the gold industry,” and describes its mandate as working “to make gold more accessible, devising solutions to broaden the understanding and use of gold as an investment asset, and ensuring the gold industry’s voice is heard on the global stage.” According to this organization, the following are the 20 countries with the largest gold reserves:
In addition to the nation-state central banks, the World Gold Council also notes that the International Monetary Fund keeps 2,814 tons of gold on hand (making it the third largest gold holder in the world, ranking between Germany and Italy). The European Central Bank reports official gold holdings of 504.8 tons, making it the world’s 13th largest gold holder (it has less gold than India, but more than Taiwan).
The more things change, the more gold reserves remain the same
Curiously, these levels of gold reserves have remained mostly static in recent years. WGC data going back to 2008 show that since the time of the last Financial Crisis there’s been essentially no change in central bank gold holdings at a majority of the central banks surveyed. Gold reserves held by France, Switzerland, and the Netherlands all declined slightly within a year or two of the Crisis, while gold reserves actually increased a bit in India — but since 2010, gold reserves for these four countries, as well, have held constant.
Presumably, this is because the global economy has looked to be in reasonably fine fettle since that crisis passed. After all, one of the reasons central banks hold gold is to be able to use it as a tool of monetary policy in times of crisis — buying gold to give an impression of financial strength and liquidity and, when necessary, selling gold to implement that liquidity. A lack of change in gold holdings, therefore, suggests that central banks have seen no compelling need to make such changes.
The only countries that have undertaken to significantly increase the number of official gold holdings in their foreign currency reserves are Russia, Kazakhstan, China, and Turkey. The first three have been steadily increasing the amount of gold they hold in reserve. Turkey, which was a net seller of gold in 2015 and 2016, resumed gold purchases in earnest in 2017, adding 187.7 tons, and has added a further 26.2 tons to its reserves so far in 2018. Combined, that’s 213.9 tons more gold — about a 57% increase in total gold reserves at Turkey’s central bank. While it’s difficult to speculate on what may be motivating Russia, Kazakhstan, and China to increase their reserves, Turkey’s move appears to be tied to a policy change whereby Turkey has begun accepting gold from commercial banks as part of its requirement that they maintain reserves at the central bank.
It’s also worth noting that the amount of gold held by a country’s central bank does not always correlate with the level of gold mining going on within that country. For example, a recent survey of gold reserves and gold production conducted by the U.S. Geological Survey (USGS) confirms that while the United States is the No. 1 holder of gold reserves worldwide, it was only the fourth largest gold producer in 2017, producing just 245 metric tons last year. China and Russia both out-produced the U.S. in terms of gold production — as did Australia, which does not even rank in the top 20 countries by gold reserves.
Likewise, Brazil, Canada, Ghana, Indonesia, Mexico, Papua New Guinea, Peru, South Africa, and Uzbekistan were all significant producers of gold last year but did not rank in the top 20 countries for central bank gold reserves. In part, this is probably because gold mining in many countries is actually conducted by foreign companies, which take the gold out of the country once mined.
For example, Papua New Guinea ranks among the world’s poorest countries, and thus wouldn’t be expected to rank highly in terms of gold reserves. In Papua New Guinea, production at the Hidden Valley mine is conducted by Harmony Gold Mining Company (NYSE:HMY) and an Australian partner. Barrick Gold (NYSE:ABX) operates the Porgera Gold Mine, and Rio Tinto(NYSE:RIO) used to operate Papua New Guinea’s Panguna mine.
Gold “reserves” still in the ground
Another distinction that needs to be drawn is between the level of gold “reserves” that a country’s central bank holds as part of its foreign currency reserves, and the gold reserves that concern investors in gold mining companies — gold reserves that are in the ground, economically recoverable by mining, but not yet mined.
Here, too, the United States ranks fourth in the world — this time behind Russia and South Africa, and also again behind Australia. With 9,000 tons of gold reserves in the ground, Australia is the world’s richest repository of gold reserves under this definition of the term.
What’s interesting in this particular set of USGS data is that, according to the survey, at current global gold production levels (3,150 tons of yellow metal being mined annually), global reserves of gold (54,000 tons) will be exhausted in about 17 years. Both U.S. and Canadian mines look likely to be played out in just over a dozen years. Ghana has a bit longer — about 12.5 years — before its gold reserves are exhausted by mining. China, on the other hand, which is mining gold at a frenetic pace today (440 tons per year), could be out of natively produced gold within less than half a decade. At that point, China will need to buy gold abroad if it intends to continue growing its gold reserves.
On the other hand, Australia could still be mining gold three decades from now if it continues digging at a steady rate of 300 tons per annum. Russia can continue for another two decades, despite mining nearly as much as Australia is currently — 255 tons a year. And South Africa, which is mining at a much more sustainable rate of 145 tons per year, but boasts the world’s second-largest known gold reserves at 6,000 tons, has another 40-plus years of gold mining.
Investors looking to own profitable miners for the long term might be well advised to focus their efforts on miners holding a significant interest in mines in these last three countries.
Why hold gold?
Should investors be interested in investing in gold at all? That’s perhaps the biggest question. Unsurprisingly, the World Gold Council answers with a resounding “Yes!” — and for reasons that may appeal to individual investors fully as much as they appeal to institutional investors as well as nation-states.
WGC argues that over the past 10 years, gold has outperformed all other major asset classes with the exception of U.S. stocks, producing average annual returns of nearly 6%. That’s a better return than what “commodities” investing in general produced — actually the worst-performing asset class of the last decade. Gold’s returns were much better than merely holding cash. Likewise, gold outperformed both U.S. bonds and international stocks. What’s more, over the past 20 years, gold outperformed all asset classes — U.S. stocks included — returning nearly 9% per year. (It is worth pointing out, however, that while 10- and 20- year timespans may appear objective, they also happen to date from very close to a pair of stock market peaks — the 2008 Financial Crisis for one, and the 2000 Dot-Com Bubble for another. In both cases, this it would have been hard for stocks to outperform when starting from such high valuations).
Still, these are the kinds of profits that may entice investors to add a small amount of gold to their portfolios — and they’re not the only advantages that the WGC touts. In an appeal to risk-averse investors, WGC argues that gold investments are “a diversifier” that can “mitigate losses in times of market stress.” Admittedly, WGC is “talking its own book” here when it says this. Still, between the memory of quantitative easing still fresh in investors’ minds, and the fear that low-interest rates are likely to rise from hear (spurring inflation), it’s easy to see why investors might see gold as the proverbial “rock solid investment.“
Lucky for us, America still has a lot of it.
Source: The Motley Fool