Gold won’t solve your budget problems



Most of us have a few coins lost down the backs of our sofas. Only the foolish think they can solve their money worries by fishing them out. That’s more or less what politicians in Venezuela and Italy are contemplating at the moment, though. The Latin American government sold more than 40% of its gold reserves last year to fund government spending and bond payments, according to opposition lawmakers.

Italy, too, has been roiled with controversy this week after La Stampa newspaper reported that the government was considering selling part of its gold reserves to support its budget — an interpretation of a proposed law rejected by its backer, but which Deputy Prime Minister Matteo Salvini has nonetheless described as “an interesting idea.”

It’s certainly true that the two countries’ central banks probably hold more gold than they need. About 77% of Venezuela’s foreignreserve assets are bullion, according to the World Gold Council, a higher share than in any other major economy. After it, only the US, Germany, and Tajikistan have a bigger proportion of gold on their central-bank balance sheets than Italy’s 66%

The US, Germany, Italy, and the IMF hold about half of the world’s official gold reserves.

That’s in many ways an accident of history. Since the end of the goldstandard era, there’s been little need for central banks to own much more of the metal than the single-digit percentages held by China, Switzerland, Japan, the UK and other major economies.

Having a large share of reserves in metal can leave central banks overexposed to the movements of a single volatile asset, in contrast to a portfolio comprising a range of currencies and the IMF’s Special Drawing Rights. In addition, gold is costly to store and trade compared with banknotes and deposits. Unlike foreign government bonds, it doesn’t provide any return.

As a result, the main reason for holding it — beyond the zombieapocalypse arguments that it’s default-proof — is that it tends to attract safe-haven demand in the teeth of a crisis. Because of this countercyclical behaviour, a sprinkling of yellow metal can reduce the overall volatility of a portfolio. Too much, though, can produce the opposite effect, such as when the dollar price of gold fell by 28% in 2013.

One problem is that it won’t make much of a difference. Italy’s trailing 12-month budget deficit is currently running at around 44 billion euros ($50 billion). That’s equivalent to about 1,180 metric tons of gold at current prices, a bit less than half of the Bank of Italy’s total holdings or a third of its total foreign reserves. No one’s suggesting (yet) that Italy should meet all of its overspending with bullion sales, but the numbers should illustrate how quickly your central bank nest egg can get used up. Italy’s trailing 12-month budget deficit has narrowed in recent years, but is still substantial.