Central banks have been diversifying their reserve assets for many years, making any foray into goldconsistent with the effort.
The diversification theme is evident in a data comparison between 2002 and the present, which shows that in 2002 the U.S. dollar represented about 70 percent of the world's reserve assets.
Today, the tally is 63 percent.
In other words, central banks have reduced their exposure to dollars in favor of other currencies. (The Euro has been the largest beneficiary by far, with it accounting for about 27 percent of world reserve assets compared to 20 percent in 2002). Any movement into gold is likely to be small: this is still a fiat-currency world.
For those that believe gold is a better alternative, keep in mind a few ideas:
* The U.S. dollar may be a paper currency but it is backed by the hegemony of the United States, which remains the world’s biggest power politically, economically, and militarily.
* Gold is not a liquid instrument; U.S. Treasuries trade near $500 billion per day. Liquidity is an important risk factor of great importance to the world’s central banks.
* No alternative to the U.S. dollar is waiting in the wings; China does not have a bond market largest enough to house the world’s reserve assets and Europe’s isn’t as liquid.
* All of the gold that has ever been mined fits into about three Olympic-sized swimming pools. Who out there believes that nations would prefer to put their sovereign money in those pools of gold rather than in the paper currency of the United States, which is backed by its full faith and credit, its people, and its land? (Scarlet O’Hara said it best when she said, “Land: It’s the only thing that lasts!”)
Diversification into gold? It fits the diversification pattern of the past decade. A replacement for fiat currencies? Extremely unlikely.
Tony Crescenzi is Senior VP, Strategist, Portfolio Manager Pimco. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."