SA and US Central Bank’s Gold Holdings

On the face of it, the SA Reserve Bank (Resbank) 1.5 per cent as much gold as the US Federal Reserve (Fed); about 4 million ounces by the Resbank and 261.5 million by the Fed. This is illusory. The Fed does not own any gold; it owns Gold Certificates. The comparison, for those who like to believe that the notes in their possession are backed by gold has to take the following into account:

The value of the Fed’s Gold Certificates is limited to $42.222 dollars, which is the fixed price at which the US Treasury is entitled to repurchase the certificates from the Fed.

The total value to the Fed is therefore a little more than $11 billion, compared to a value of about $349.5 billion at the current gold price.

Gold held by the Resbank at 31 December 2010 was valued at R37.5 billion, 45.45 per cent as much as the R82.5 billion of notes and coins in circulation.

A gold price of R20,541 or gold holdings of 8,835,811 ounces would have been required for the value of the Resbank gold holdings to cover the rand notes and coins in circulation on 31 December 2010.

A great deal more attention is likely to be given to the gold holdings of governments and their central banks during the next few years. As the consequences of excessive printing of fiat currencies become clearer, countries that have more stable currencies can be expected to attract investments away from those that do not. Under current circumstances the Resbank should possibly consider increasing its gold holdings rather than its foreign currency holdings.

Author Eustace Davie is a director of the Free Market Foundation. The views expressed in this bulletin are the author’s and are not necessarily shared by the members of the Foundation.

FMF Policy Bulletin/ 2 February 2011