Global risk and demand for gold by central banks

Abstract

This article examines the influence of global risk on the holding of gold by central banks based on annual data for 100 countries during 1990–2015. We use a dynamic panel generalized method of moments model to estimate this effect, controlling for a variety of domestic factors. Consistent with portfolio diversification and perception of gold as a safe asset, we find that the gold holdings of central banks increase in response to higher global risk. This effect varies based on the levels of capital account openness, reserve adequacy, income status and currency regimes. These findings suggest that central banks adjust their gold holdings in response to changes in global risk conditions, with the magnitude of response depending on country-specific vulnerabilities.