Thursday, December 9, 2010

GCC urged to boost gold reserves

I've blogged about central banks and citizens of China, Russia, India, and other emerging countries accumulating gold for their reserves.  Europeans have also been stuffing German and Swiss safety deposit boxes and vaults with gold in the wake of sovereign debt crises in Greece, Ireland, Portugal, and Spain (and spreading into the core Euro countries).  The Gulf countries are joining the gold bandwagon, as their petrodollars sink in value with each round of monetary easing by the Fed.  The title of the article is self-explanatory.

GCC states should boost their foreign reserve holdings of gold to help shield their billions of dollars of assets from turbulence in global currency markets, say economists at the Dubai International Financial Centre Authority (DIFCA).

Diversifying more of their reserves from US dollars to the yellow metal would help to offer central banks in the region higher investment returns, said Dr Nasser Saidi, the chief economist of DIFCA, and Dr Fabio Scacciavillani, the director of macroeconomics and statistics at the authority.

"When you have a great deal of economic uncertainty, going into paper assets, whatever they may be - stocks, bonds, other types of equity - is not attractive," said Dr Saidi. "That makes gold more attractive."

Declines in the dollar during recent months have dented the value of GCC oil revenues, which are predominantly weighted in the greenback.

Longer term, gold could play a more important role in the global monetary system as the shift from developed world to emerging markets intensified, the two DIFCA economists said in a report published yesterday.

The dollar's position as the leading reserve currency was likely to diminish as US dominance of the world economy dwindled.

Gold could help to fill the void in the monetary system in the absence of the euro or the yuan proving viable alternative reserve currencies, they said.

Recent turmoil in currency markets has hastened moves by other emerging markets including India, China and Russia to add to their gold reserves. Gold accounts for about 25 per cent of the total reserves of the European Central Bank.

"The value of paper money is being debased by injections of quantitative easing in Europe, Japan and the US," said Dr Scacciavillani. "Gold is a means of exchange not dependent on any political decisions and has a role as a hedge against inflation and economic risk."

 Longer term, the commodity's importance would not diminish the need for the GCC to develop more monetary independence by pressing ahead with a single currency project, he said.

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