How stable and liquid is physical gold?

The World Gold Council is an association comprised of 23 members of the world’s leading gold mining companies those represent approximately 60% of global corporate gold production.  The main goal of the organization is to develop gold market by stimulating and sustaining demand for gold.  Historically, gold is used as a hedge against inflation and deteriorating currencies thus, according to the prolonged financial crisis, the World Gold Council suggested that added gold to the high-quality liquidity buffers could bring stability to the banking system. Additionally, due to gold’s characteristics the World Gold Council expressed believe that gold could be included in banks’ reserve asset portfolios and be used as collateral for liquidity financing.  So could gold be acknowledged as a stable and liquid global currency which is equivalent to high-quality capital?

The physical gold may be purchased from mine producers those refine gold according to the London Good Delivery – the internationally acceptable standards and in the global OTC market.  The reference gold prices are fixed in London twice during the day and either the morning (AM) or the afternoon (PM) fixed price is used for pricing long term contracts. According to the international standards, the bars must be at least 995 parts gold of 1000 and weight between 350 and 430 fine ounces. The physical gold is mainly stored at the Federal Reserve Bank of New York and the Bank of England – the largest custodians safeguarding other central banks’ gold reserves. However, investors may choose a broad array of financial products such as Exchange Traded Funds, Futures and Options, Warrants, Gold Mining Stocks, Gold oriented funds and others those provide opportunities without a purchase of physical gold to gain from the movements of gold price.  

According to the Gold Demand Trends, a report for second quarter 2012 which was prepared by the World Gold Council in August 2012, the total amount of the gold purchased by official sector institutions was 157.5 tonnes and accounted for 16% of overall Q2 gold demand. During the first quarter of 2012, official sector purchased 254.2 tonnes of gold which reflects a 25% increase compared to the 203.2 tonnes of gold purchased during the first quarter of 2011. The biggest buyers were the National Bank of Kazakhstan, the central bank of Philippines, the central bank of Russia, the National Bank of Ukraine, the central bank of Turkey and South Korea’s central bank.

Going back to the World Gold Council’s suggestions, the advantage of established gold as banks’ reserve asset is elimination of credit risk; however, market and liquidity risks may be even severe for financial stability.

The main goal of central banks is to maintain price stability. Moreover, deteriorating exchange rates of domestic currencies reflect the worse economic state of the country.  Reduced purchase power of domestic currency forces governments to reconsider economic policy. Debts of governments and corporations are covered by collateral assets and guarantees. So creditors have legal obligations to repay debts. Market value of equity depends on the asset allocation decisions. In all these cases the responsibility is assigned for managing uncertainties and made decisions.

So will the World Gold Council take responsibility to maintain stable gold price and even more will it emerge as a key authority responsible for the stable global financial system?