Gold reserves are the amount of bullion that is held by the central bank or the treasury of the country. It contributes to the nation's creditworthiness in the issuance of currency and bonds. Gold reserves that are held by the government should be distinguished from gold held by individuals or private institutions. According to the World Gold Council, the official gold reserves in the whole world amount to almost 35,000 tons, or 13 percent of total official reserves (as of Q1 2020), as the chart below shows. The concept of holding gold reserves started more than a century ago. Countries then strictly adhered to a practice known as the gold standard.
Gold Reserves Under the Gold Standard and Now
In the past, governments around the world were committed to the gold standard. Under this monetary system, the price of domestic currencies were fixed to a specified amount of gold. In other words, national monies could be converted to gold at a fixed price.
In 1834, the U.S. dollar was defined as (or backed by) 1.50 grams (23.22 grains) of gold. It corresponded to the price of gold set at $20.67/ounce, and it stayed that way until 1933. The period of 1880 to 1914 was a time of unprecedented growth, opportunities, and free trade in terms of goods, capital, and labor. However, the gold standard broke down during the World War I because some countries adopted inflation to cover their military expenses. It was briefly restored in a limited form, but in 1971 the gold window was ultimately closed.
However, most countries, whether developed or developing, still hold significant amounts of gold reserves to prove their creditworthiness. As the Dutch National Bank once said “Gold bolsters confidence in the stability of the central bank’s balance sheet and creates a sense of security.” The United States has the highest amount of total reserves, followed by Germany, Italy, and France, as the chart below shows.