Emerging Market should go for Gold

Prof. Rogoff has this(Project Syndicate) take on the balance sheet of central banks in Emerging Markets. He suggests that Emerging Markets should reduce the share of hard currency( Dollar, pounds), and should start shifting some reserve to gold. His argument are:

1.Since all the emerging market are running after the G-Sec of advanced countries, thus driving there interest rates down. They could shift to gold thus reducing dependence of G-Secs, this would help increase the interest rates on their bond. Since the returns on gold is almost same as the return on short term securities, so no loss of interest income there.

2. Also he recommends emerging countries, to pool resources and store gold at one location, may be at New York Fed.  But this would require a lot of trust between the nations.

Though I would politely disagree with it. Unless we are expecting Apocalypse, its better we have our reserve in hard currency.

  1. Definitely gold is a stable long term asset, but in medium run and short run, it has got remarkable volatility. As a central bank the mandate is not to make profit by interest income but rather to stabilize the currency against any external shock. For that its better to have hard currency or G-Sec as reserve.
  2. Majority of trade is still invoiced in $. In fact 75% of 100$ bills circulate outside USA. Most of the debt raised by emerging countries is again denominated in $. So to provide backstop against any eventuality, they better be hoarding $ rather then any other other thing. It actually help in better planning also.

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