Gold plays an important role in the financial reserves of numerous nations. Central banks are buying it to increase economic stability. They also use it to diversify their portfolios, as the price of gold tends to rise when the US dollar loses value. The inverse ratio of gold to the US dollar, another important reserve asset, adds to its appeal. When the dollar loses value, gold typically rises, which allows central banks to protect their reserves during times of market volatility.
Of course, not all central banks are created equal, and what the Fed does has much more influence on the price of gold than Turkey’s central bank, for example. The analysis, which is based on a multiple regression model, shows that there is a direct relationship between the money supply and the price of gold. As you can see, the increase in the US monetary base is clearly linked to the rise in gold prices that we’ve seen over the last ten years. But even though the four countries have bought significant amounts of gold in the last ten years, they are still lagging behind their western counterparts. Gold accounts for just 22 percent of Russia’s reserves, while China’s stocks of just under 2,000 tons account for just 3 percent
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Gold has been an important part of nations’ financial reserves for centuries, and its appeal is not waning as central banks will once again be net buyers of gold this year. The fact is that gold functions as a monetary asset — for various reasons — and that central banks play a crucial role in determining gold prices. What is less well known is that there is a direct connection between all the money printing and the actual price of gold
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