- June 7, 2016
- Posted by: admin
- Category: Financial Sector Management
By Oliver Manyemba
1997
When the Gold Price was maintained by monetary authorities at a predetermined level ( US$ 35/oz) before 1968 the gold market functioned as a distribution mechanism rather than a price setting device. However with the advent of the two trier market in March 1968, after the central banks had given up trying to defend the fixed price, the price of gold was left free float and market forces took the driving role. This changed the perception as a stable benchmark and monetary reserve asset. The yellow metal lost its pivotal role in the international monetary system. Stability in the system gave way to volatility making the world markets a riskier place to do business.
Since then a vibrant global market for gold as an asset in its own right has developed – remaining open round the clock. The means to trade now involves a wide array of instruments ranging from spot deals to paper gold and derivatives.
As early as the 17th century central banks and other monetary authorities were already at the center stage of gold trading they have remained integral to the gold market to this day. Other key market participants include the producers, fabricators, arbitrageurs, investors and speculators.
To date it is clear that in spite of gold’s historical monetary significance and confidential restricted trading a freely functioning vibrant gold market is very much in evidence. It would therefore be recommended that monetary authorities in gold producing countries acknowledge the recent developments in the market and accordingly adapt their gold trading and management strategies in order to enhance return on their reserves. However, in view of the complexity of the gold market there is need for specialized training to be given to those working in the treasury departments of monetary authorities charged with the responsibility of managing gold reserves.
Furthermore even though gold lost its role as the international monetary standard, it has maintained its utility as a reserve asset-second only to the US dollar .And indeed after all is said and done, the metal remains a central banker’s confidante in economic policy management and is seems poised to remain such an important factor in international monetary relations for many years to come. It would therefore be prudent for monetary authorities to maintain a gold portfolio as part of gross reserves. This portfolio should however, be actively managed to ensure that the opportunity cost of holding the gold is at least equal to or lower than alternative investment.