After a long lacklustre period during the 1980s and 1990s, the price of gold has picked up significantly since the new millennium, and central banks, after having steadily reduced their allocation to gold, have resumed their gold purchases. This has been particularly the case for emerging central banks, which have benefited from a strong increase in their reserves and have been willing to diversify away from the US dollar, reflecting the emergence of a multipolar world and the impact of the global financial crisis. As a result, in 2018, gold represented about 13% of global central bank reserves, with very strong dispersion between developed central banks, historically heavily invested in gold, and emerging central banks, with much more modest holdings, but often rising exposure.

Attraction to gold is explained by a number of well-known properties. Gold prices are negatively correlated with real interest rates as well as trends in the US dollar, illustrating in the latter case the role of gold as a form of substitute to the US currency. It also often plays a safe-haven role during crises, and displays positive sensitivity to inflation; we show that the relationship is actually more significant with inflation volatility.

On this basis, we propose two models to forecast gold prices, a monetary-based one and a debt-based one, which can help us determine a medium-term fair value range for the gold price. The variables we use in these models are policy rates and exchange rates for the major countries, US real rates and credit spreads, as well as US debt levels for the second model. We also confirm that the behaviour of gold depends on the macro-financial environment, and that it tends to provide the best performance in risk-averse periods.

We then explore the relevance of gold as an asset class for central bank portfolios and conduct portfolio simulations, using our 10-year forward-looking scenarios and asset returns, as well as diversification-based optimisation schemes, which best emphasise gold’s diversification potential. The recommended gold weighting is the highest, at 7% of total assets, in the case of portfolios essentially invested in fixed income assets, as gold shows limited correlation with these; but in all our simulations, an even modest allocation to gold looks justified.

These results should be seen as indicative, as central banks’ allocations do not respond to a standard return/volatility framework. Defining a more precise target weight for gold depends on a number of factors, including the investor’s objectives, risk appetite, current portfolio and expected returns on assets, but in all cases our optimisations lead us to recommend some allocation to gold in central bank reserves portfolios.


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Head of Quant Solutions, Multi Asset Solutions
RC - Author - PORTELLI Lorenzo
Head of Cross Asset Strategy, Head of Research at Amundi Italy, Amundi Investment Institute
RC - Author - TAZE-BERNARD Eric
Senior Advisor, Amundi Investment Institute