If humans were like birds and beasts, they would be spared of one unending preoccupation : the search for store of value. Some other animals too store; but they store the consumables, mainly food for the rainy day. Humans alone seek to store value – accumulate wealth. And this is true not only of individuals; countries too store value. And from this has arisen the perennial search for the optimal asset which is likely to conserve its value at all times.
At most times in the history, it has been precious metals or jewels, notably gold that have been held in reserve portfolios of countries. Because, for convenience of storage, this asset needs to be non-perishable, divisible and liquid – that is which can be easily exchanged for another product. And gold satisfies these perquisites beautifully.
However, post WWII, with the increasing preeminence of US, the US dollar (USD) denominated assets – mainly US sovereign debt, gradually replaced gold in reserve portfolios. USD could not be expected to lose its value and everyone accepted it.
However, beginning 2000, doubts began creeping in as to how ‘everlasting’ the USD could be. This was a result of the decline in US clout in global matters – both political and economic. The mounting debt burden, rising fiscal and trade deficits and the rapid loss of competitiveness, all contributed to the loss of glitter of the USD. Momentarily the preference shifted to the Euro. But that too could not last for long. The financial crises and subsequent sovereign debt crises in Europe have heightened reserve manager attention to the need for increased diversification away from USD and Euro assets.
The growing clout of China has also contributed to the move. However limited availability and convertibility of Renminbi denominated assets have restricted their share in the reserve portfolios. Several other countries like Canada, Australia and Switzerland have Triple-A sovereign credit ratings; but the same problem of limited availability and convertibility limits their weightage in the reserve portfolios. Under these circumstances gold is likely to make a significant come back.