Why is gold part of the world's reserves?
The United States beat the rundown of the world's gold stores with in excess of 8,000 tons of gold stores.
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| America has eight thousand tonnes assets of Gold |
Pakistan has 64 tons of gold
stores, while adjoining India has 703 tons of gold stores which are important
for a nation's Central or State Bank holds.
There are many types of
central bank reserves in different countries of the world, including gold and
other foreign currencies.
Why is gold part of central bank reserves?
While the central banks of
countries around the world have foreign exchange reserves in the form of
dollars and other foreign currencies, gold is also present in these reserves.
Talking to the source about
why gold is a part of these reserves, Saleem Raza, ex- governor of the Central
Bank of Pakistan, said that gold has a chronological background of being a part
of the assets.
He said that before the
dollar turned into worldwide exchanging money, gold was exchanged around the
world.
A country's exchange was associated
to its gold reserves, but in the 1970s the dollar became the world's dealing
currency. However, the worth of gold remained and it is still considered a significant
source of global trade.
Saleem Raza said that
although gold has been an important source of global trade, it is now less used
as a medium for world trade due to the huge fluctuations in its price in
today's world. Reserves are an important part and are still recognized as a
viable source of trade.
Saeem Ali, a professor of
economics at the Institute of Business Administration in Karachi, said it was
true that gold reserves had a historical background and that the dollar had
replaced it as a global trading currency. Also intact because gold is a
physical asset and its value is still considered higher than that of paper
currency.
Therefore, different states
of the world have gold reserves and they are a vital part of a country's
central bank reserves.
He said that gold is an asset
that can be sold to raise money immediately as gold has a significant value in
the global market and it can be sold quickly as an asset. He said that gold is
a metal and any nation can build its stores by getting it from the world
market.
Sana Tawfiq, a monetary
examiner at Arif Habib Securities, said that in a country's national bank,
where unfamiliar cash holds are kept, so is gold.
He said that the dollar,
other foreign currencies and gold together represent a country's foreign
exchange reserves.
What does the country's gold reserves have to do with the printing of currency notes?
Does any country print currency notes equal to the value of its gold reserves?
Talking about it, Sana Tawfiq
said that there was a time when a country used to print currency notes equal to
the value of gold reserves, but when gold became more expensive and it was made
part of the reserves. When it became difficult, then this series stopped.
She says that now the
printing of currency notes is based on their demand and supply in the market
and the same is happening in Pakistan now that the central bank prints currency
notes on the basis of supply and demand in the market.
What is the significance of gold reserves in case of economic crisis?
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| Gold is present in the form of ornaments in the houses |
Former SBP governor Saleem
Raza said that when a country's gold reserves have to be sold, it means that
the country has gone bankrupt and has no money left for foreign trade and payments.
Citing this as an example, he
said that in the subcontinent, gold is present in the form of ornaments in the
houses and when a house is in dire financial straits and has no hope of
financial resources from anywhere, then the family sells the ornaments to make
money. Out of the crisis, however, this process is considered very ominous in
our societies.
This is the circumstances
with nations where when a nation appears near the very edge of a fiscal
emergency and doesn't have the cash for outer repayments, then, at that point
the work is done through gold stores, if it is through outside installments. It
ought to be ended by selling it and obtaining dollars.
Saleem Raza said that there
was no occasion in the history of Pakistan when the country had to sell gold
for financial crisis and external payments but it happened once in India and
because of this their central government was wiped out. ۔
He said that in the first
year of the nineties, India had to sell gold due to its financial crisis, which
led to a lot of public sentiment against the central government and it had to
leave. Then Manmohan Singh came as finance minister and he started transformations
to get the Indian financial system out of the calamity."
Sana Tawfiq also confirmed
that a country sells its gold reserves only when it has no other choice.
Do gold reserves also stabilize its domestic prices?
Global gold prices around the
world have reached very high levels in the last several years, which has also
had a huge impact on local gold prices in Pakistan. At present, the price of a
gold towel in Pakistan has exceeded one lac ten thousand.
Can any help be sought from the central bank through gold reserves to stabilize gold prices in the country?
In this regard, Sana Tawfiq
said that there is no link between the price of gold in the market and the
central bank's gold reserves, nor does it stabilize or bring down the price of
gold in the market.
The central bank's gold
stores are requisite for the complete reserves for outside repayment, while the
price in the gold market relies upon whole market.
He said that the same happens in Pakistan and the SBP has 64 tonnes of gold reserves worth 3.8 billion and the central bank has more than 22 billion in reserves which are offset by gold prices in the local market.
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