World Bank Gold Investing White Paper 2024

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Kamol Alimukhamedov
HANDBOOK FOR
GOLD INVESTING
ASSET MANAGERS
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ii | GOLD INVESTING HANDBOOK FOR ASSET MANAGERS

CONTENTS
INTRODUCTION 2
I. BACKGROUND ON THE GOLD MARKET 5
Market structure 5
Geopolitical considerations 11
II. GOVERNANCE AND STRATEGIC ASSET CREDENTIALS OF GOLD 13
Capital preservation 15
Liquidity considerations 20
Return consideration 24
Gold performance across institutional portfolios 29
III. PORTFOLIO MANAGEMENT 39
Standards 39
Trading 40
IV. OPERATIONAL ASPECT OF GOLD TRADING 50
Buying gold through local production 50
Custody options 52
Logistics considerations 53
Gold accounting framework 55
V. SUSTAINABLE INVESTING IN GOLD 58
REFERENCES 65
INTRODUCTION
Throughout history, gold has played a vital role as a financial asset in the global financial
system. It has been prevalent as a currency in many civilizations, including Ancient Greece,
Rome, and Egypt. In the modern era, gold continues to play a critical role in the global
financial system, serving as a hedge against inflation, a safe haven asset, and a reserve
asset for central banks.
In the 20th century, how gold was used in financial systems underwent significant changes.
The gold standard, which tied the value of paper currency to the price of gold, prevailed until
the 1930s, when it was abandoned by most major countries due to the Great Depression.
However, the gold standard remained a critical part of the international monetary system until
1971, when the US government ended its convertibility to gold.
In recent years, gold has regained its importance as a financial asset, with many investors
using it as a hedge against inflation and market volatility. In addition, central banks and other
financial institutions continue to hold significant amounts of gold as part of their reserve assets.
The role of gold as a reserve asset for central banks has been a significant driver of demand
for the precious metal. Gold is also considered a safe haven asset during times of economic
uncertainty and geopolitical turmoil, making it a popular among investors looking to hedge
against market volatility.
In addition to its role as a reserve asset, gold is a widely traded commodity in financial
markets. Gold futures and options are actively traded on commodity exchanges, providing
investors with a range of investment opportunities. Gold is also used in the production of
various industrial and consumer products, including electronics, jewelry, and medical devices.
The increasing awareness of environmental, social, and governance (ESG) issues in the
investment community has led to a growing interest in responsible sourcing and use of
gold. Initiatives such as the LBMA’s Responsible Sourcing Program (RSP) and the World Gold
Council’s Responsible Gold Mining Principles (RGMP) aim to promote sustainable and ethical
practices in the gold mining industry.
The role of gold in the global financial system has evolved over time, with changes in
monetary policy, economic conditions, and technological advancements influencing demand
and supply dynamics. Despite these changes, gold remains a crucial component of the global
financial system and is likely to continue to play an essential role in the future.
2 | GOLD INVESTING HANDBOOK FOR ASSET MANAGERS

The market disruptions brought about by the 2008 Global Financial Crisis (GFC), the US
and China trade war, Brexit, and the COVID-19 pandemic, as well as a prolonged period
of negative real interest rates and geopolitical uncertainties caused by financial sanctions
imposed on Russia to freeze its foreign reserves, reinforced the strategic importance of gold
as a buffer against financial instability. Asset managers’ changing sentiments are reflected in
a 2022 World Gold Council (WGC) survey in which respondents marked “historical position”
and “performance during times of crisis” as the most relevant factors for holding gold. Central
banks in 2022 were also more optimistic on gold as a reserve asset, with 61 percent of
respondents stating that they expect global gold reserves to increase over the next 12 months.
Central banks’ stance against gold shifted in the period following the GFC, and they have
been the net buyers since then, despite ever-increasing gold prices, after having been net
sellers in preceding periods (Figure 1).
FIGURE 1. CENTRAL BANK NET GOLD PURCHASES AND SALES
Source: Bloomberg, World Gold Council.
Two main factors may explain recent increase in gold purchases by central banks. First,
gold is viewed as a safe haven and desirable asset during times of economic, financial, and
geopolitical uncertainty as well as a portfolio diversifier. Second, gold is seen as a safe asset
when countries are subject to financial sanctions and asset freezes. Skeptics, however, point
to drawbacks in reliance on gold, including its cost to transport, warehouse, and secure and
its lack of interest. Despite these disadvantages, gold remains a popular asset for central
banks due to its historical track record and the well-regulated markets for trading.
The available empirical evidence suggests that some reserve managers respond to relative
costs and returns by increasing the share of gold in their reserves when the expected return
on financial assets such as US Treasury securities is low, while viewing gold as a hedge
against economic and geopolitical risks. Notably, the proportion of gold held in reserves
GOLD INVESTING HANDBOOK FOR ASSET MANAGERS | 3

by both advanced economies and emerging markets tends to increase with measures of
economic uncertainty, with advanced economies showing an additional increase in response
to measures of geopolitical risk (Arslanalp, Eichengreen, and Simpson-Bell 2023).
This report first discusses the credentials of gold as a strategic asset by analyzing its historical
risk and return characteristics, its correlation with various asset classes, and the historical and
future performance of several stylized institutional portfolios with varying allocations to gold.
The later part of the report addresses practical aspects for reserve managers of investing into
gold and discusses various gold buying practices; gold trading, storing, and accounting; and
gold liquidity management strategies. ESG considerations for gold investments are covered
in the final chapter.

I. BACKGROUND ON THE
GOLD MARKET
M A RKET STRUC TURE
The gold market structure consists of several key players and components that influence
the price and availability of gold (Figure 2).
At the top of the structure are the gold mining companies, which extract gold from the
ground and sell it to refiners. Refiners then process the gold and sell it to bullion banks,
which are responsible for trading large volumes of gold on a daily basis. Bullion banks also
act as market makers, providing liquidity to the market and facilitating transactions between
buyers and sellers.
FIGURE 2. STRUCTURE OF THE GOLD MARKET
Gold market structure Total annual demand (10-year average, 2013-2022) 4,653 tonnes
and flows 52% Jewellery 26% Bar and coin 8% Technology

(2,222t) 52% (1,128t) 26% (329t) 8%
Exploration companies reserves Fabrication Distribution Use Recycling
M arkets/ exchanges
M ajor mining OTC markets
companies
e.g. London, Zurich Fabrication finished Paw nbrokers,
reserves bullion Wholesalers Consumers scrap
e.g. Jewellers, goods scrap dealers
Junior mining doré Ref ners bullion Bullion banks electronics industry,
companies dental suppliers,
M etals exchanges mints, other products
Retailers
e.g. SGE, DGCX, LME
Artisanal miners doré
sem i-finished goods

scrap
scrap
2% ETFs and similar products 13% Central banks

(66t) 2% (569t) 13%
Exploration Production Reﬁning Bullion trade Financial products Distribution Use
bullion Financial services bullion Futures exchanges

companies e.g. COM EX, TOCOM Professional investors
Annual supply (10-year M ined Recycled
Investment services
average, 2013-2022) Stock exchanges
e.g. NYSE providers
e.g. Brokers/interm ediaries
Total mine supply 75% 3,482 tonnes financial

products
Recycled gold 25% 1,172 tonnes 75%
Total supply 4,653 tonnes 25%
Use
bullion Central banks
Sovereign wealth funds
Total above-ground 15 %
Source: World Gold Council. stocks (2022)
Jew ellery 46% 95,547 tonnes
17% 46%
Private investment 22% 46,517 tonnes
Investors and institutions are also key players in the gold market, buying and
Off cial Holdings 17% selling
35,715gold
tonnes for
Other 15% 31,096 tonnes
Contact:ainfo@gold.org
variety of reasons. Retail investors typically buy physical gold in the form of coins or bars,
Total above ground stocks 208,874 tonnes
22 %
w w w.gold.org
while institutional investors use futures contracts or exchange-traded funds (ETFs) to gain P.T.O.
exposure to the gold market.

Because gold has multiple sources of demand and supply as compared to other major
asset classes, its liquidity is less likely to dry up during times of market volatility. A large
fraction of the demand comes from the physical side, as gold is actively used to produce
jewelry and technology as well as being bought physically by central banks; taken together,
these factors accounted for 76 percent of the total demand in 2022 (Table 1).
TABLE 1: GOLD SUPPLY/DEMAND CHANNELS
2022Q4
Supply
Mine production 3,611.9
Net producer hedging -1.5
Recycled gold 1,144.1
Total supply 4,754.5
Demand
Jewelry fabrication 2,189.8
Technology 308.5
Investment 1,106.8
Total bar and coin 1,217.1
ETFs & similar products -110.4
Central banks & other institutions 1,135.7
Gold demand 4,740.7
OTC and other 13.8
Total demand 4,754.5
Source: Metals Focus, Refinitiv GFMS, World Gold Council.
Central banks are significant players in the gold market, holding large reserves of gold as
a store of value and a hedge against currency risk. In addition to buying and selling gold,
central banks also influence the market through their monetary policies, which can affect
interest rates and inflation, both of which can impact the price of gold. The most recent data
from April 2023 reveals that international organizations, including the IMF and the Bank
for International Settlements (BIS), possess approximately 9 percent of the world’s official
gold holdings, as indicated in Table 2. The remaining gold reserves are distributed among
countries, with advanced economies holding around two-thirds and emerging markets and
developing economies accounting for one-third.
The United States and members of the Euro Area are the dominant owners of official gold,
holding more than 50 percent of the total reserves. Meanwhile, the Russian Federation,

China, India, and Türkiye hold the largest amounts of gold among emerging markets.
This suggests that gold remains a significant component of countries’ reserve assets,
and developed economies are currently the primary holders of this valuable resource.
TABLE 2: WORLD OFFICIAL GOLD HOLDINGS
Holder Tonnes % of Reserves % of Total

United States 8,133 67% 23%
Germany 3,355 67% 9%
IMF 2,814 - 8%
Italy 2,452 64% 7%

France 2,437 66% 7%
Russian Federation 2,330 24% 7%
China 2,050 4% 6%
Switzerland 1,040 7% 3%
Japan 846 4% 2%
India 790 8% 2%
Netherlands 612 56% 2%
Turkey 587 33% 2%
ECB 507 27% 1%

Taiwan, China 424 4% 1%
Uzbekistan 393 67% 1%
Portugal 383 68% 1%
Kazakhstan 342 58% 1%
Saudi Arabia 323 4% 1%
United Kingdom 310 11% 1%
BIS 102 - 0.3%
Others 5,358 - 15%
World 35,588
Source: IMF International Financial Statistics, April 2023.
After a period of decline that lasted for several decades and in the aftermath of the
Global Financial Crisis, central banks’ gold holdings have been increasing. However, this
trend differs depending on whether a country is an advanced economy or an emerging
market. Advanced economies have been diversifying away from gold reserves, while

emerging markets have been steadily increasing their holdings. The increase in gold
reserves for emerging markets may be attributed to low interest rates on major reserve
currencies, which has led to decreased return differentials between securities and gold
(Gopalakrishnan and Mohapatra 2018).
Gold makes up around 18 percent (Figure 3) of the total reserves of the central banks, while
the share of the US dollar in total global reserves has declined from 71 percent in 2000 to
56 percent in 2022 (according to the IMF Official Foreign Exchange Reserves (COFER)),
reflecting the push among public asset managers to diversify their foreign reserves as
their safety and capital preservation objectives became more difficult to achieve through
investment in traditional assets and currencies, given the negative real yields environment.
FIGURE 3. COMPOSITION OF OFFICIAL CURRENCY RESERVES
Source: COFER and World Gold Council (Q4 2022).
Most central banks have been adding gold to their reserves through purchases in over-the-
counter (OTC) markets or local procurement programs (Figure 4). Some central banks have
stocks of inherited gold that may not conform to market standards, and they have been engaging
in gold upgrading programs. Gold ETFs have become a popular instrument among investors.
This allows them to potentially integrate the gold asset class in their tactical asset allocation.
FIGURE 4. HOW CENTRAL BANKS PURCHASE GOLD
Source: World Gold Council.

The London Bullion Market Association (LBMA), which is the world’s largest over-the-counter
(OTC) gold trading platform, is a major player in the gold market. The LBMA facilitates
trading among its members, which include bullion banks, refiners, and other market
participants. This OTC trading accounts for a significant portion of the gold market, with the
LBMA estimating that it accounts for around 56 percent of the total trading volume.
The flexibility of OTC trading allows anonymity, which is a significant advantage for some
market participants. OTC trading also provides more flexibility in terms of price negotiation
and trade execution. However, lack of regulation in OTC trading can sometimes make it
more susceptible to price manipulation and fraud.
In contrast, exchanges and exchange-traded funds (ETFs) are more regulated trading
platforms that account for around 43 percent of the trading volume in the gold market.
These platforms provide a centralized location for gold trading and play a crucial role in
establishing benchmark prices for gold. Some well-known gold exchanges include the
COMEX in New York, the Shanghai Gold Exchange, and the Tokyo Commodity Exchange.
ETFs offer investors a way to gain exposure to gold without having to take physical delivery
of the metal. ETFs hold physical gold in their custody and issue shares that can be bought
and sold like stocks on a stock exchange.
TABLE 3: GOLD TRADING VOLUMES (MARCH 2023)

DAILY AVERAGES IN US$ BILLION
Holder Tonnes In US$ Billions % of Total

LBMA trade data 82.04 45.0%
Non-LBMA trade data 16.41 9.0%
OTC
Shanghai Gold Exchange trade data 4.18 2.3%
Total OTC 102.63 56.2%

COMEX 59.60 32.7%
Shanghai Futures Exchange 14.14 7.7%
Exchanges Shanghai Gold Exchange 1.09 0.6%

All other exchanges 2.47 1.4%
Total Exchanges 77.31 42.4%
North America 2.20 1.2%
Europe 0.09 0.0%
ETF Asia 0.25 0.1%
Other 0.02 0.0%

Total Gold ETF 2.57 1.4%
Total 182.51

The United States dominates the gold ETF market, as evidenced by the presence of several
significant funds, such as SPDR Gold Shares, iShares Gold Trust, and Sprott Physical Gold
Trust, which collectively account for a substantial portion of the total holdings. The US-based
funds alone hold a combined total of 1,553 tonnes, highlighting the country’s prominence in
gold ETF investments (Table 4).
While the US leads in terms of quantity, other countries also make notable contributions
to the gold ETF landscape. The United Kingdom stands out as a significant player, with
iShares Physical Gold ETC, Invesco Physical Gold ETC, and WisdomTree Physical Gold funds
listed. Collectively, these UK-based funds hold 536 tonnes of gold, indicating a significant
presence in the market. The significant holdings of Germany’s Xetra-Gold fund, with
holdings of 230 tonnes, Switzerland’s ZKB Gold ETF, with 154 tonnes, and French Amundi
Fund, with 68 tonnes indicate these countries’ reputations as hubs for financial services,
including gold-related investments.
Overall, the gold market structure is complex and multifaceted, with a variety of players and
components influencing gold’s price and availability. Understanding the dynamics of the
gold market is important for investors and traders looking to participate in this important
asset class.
TABLE 4: LARGEST GOLD ETF FUNDS
Fund Brands Country of Listing Holdings as of Q1 2023

(to the nearest tonne)
SPDR Gold Shares US 915
iShares Gold Trust US 444
Invesco Physical Gold ETC UK 230
Xetra-Gold Germany 230

iShares Physical Gold ETC UK 227
ZKB Gold ETF Switzerland 154
Sprott Physical Gold Trust US 97
SPDR Gold MiniShares Trust US 96
WisdomTree Physical Gold UK 79
Amundi Physical Gold ETC France 68

G E OP OLITICA L C ON S ID E RAT IONS
Geopolitical risk is a major factor for asset managers to consider, especially in emerging
markets. This is because geopolitical events can have significant impact on financial
markets, as seen in the freezing of the assets of the Iranian Central Bank ($1.9 billion) in
2010, the Kazakhstan National Bank ($22.6 billion) in 2017, the Venezuelan Central Bank
($342 million) in 2020, the Afghan Central Bank ($7 billion) in 2021, and most recently the
Russian Central Bank (estimated at $258 billion) (Eichengreen 2022).
Research by Baur and Smales (2020) established a positive relationship between

gold prices and geopolitical risk, even when financial market uncertainty is taken into
consideration. The authors distinguish between expected or perceived geopolitical risk
and actual or realized geopolitical risk, concluding that the latter is more important in
driving gold prices. According to Arslanalp, Eichengreen, and Simpson-Bell (2023), reserve
managers consider gold to be a means of protecting against economic and geopolitical
risks, and they therefore tend to increase their gold holdings during times of uncertainty or
high geopolitical risk. Additionally, reserve managers in emerging markets tend to increase
their gold holdings when there is a risk of financial sanctions. The largest increases in gold
holdings by central banks often occur when the banks anticipate or face financial sanctions.
The study’s econometric analysis revealed that both the volume and the value of gold
reserves tend to rise in response to sanctions imposed by major economies such as the
Euro Area, Japan, the United Kingdom, or the United States, in either the current or the
immediately preceding years.
In their research, Baur and Smales (2018, 2020) make a distinction between expected or
perceived geopolitical risk and actual or realized geopolitical risk, and conclude that the
former is more significant in determining gold prices.
Central banks hold their reserves in a variety of assets, including fixed-income products
(such as government bonds), deposits with commercial banks or money market instruments,
currency deposits with other central banks or multilateral organizations (such as the Bank
for International Settlements or the International Monetary Fund), Special Drawing Rights
(SDRs) with the IMF, and gold. Around 85 percent of their currency reserves are held in
US dollars, euros, or British pounds (IMF COFER 2022Q3). This means that they may not
be able to access these reserves if there are problems with these currencies. Gold differs
from other central bank assets in that it can be stored in the home country and is insulated
from geopolitical risks. However, gold stored locally can only be exchanged for domestic
currency or used to settle obligations with countries that accept it as payment. It cannot be
used as collateral for swaps and loans. Although geopolitical risks are likely to strengthen
gold’s role as a reserve asset, the disadvantages of using physical gold for financial
transactions must be carefully considered.
Recent sanctions against Russia have raised the possibility that other countries’ central
banks may shift their reserves from foreign exchange into gold. This is because gold is a
physical asset that can be stored domestically, unlike foreign exchange reserves, which can
be frozen by sanctions.

In half of the ten highest annual increases in gold stockpiles since 1999, the affected country
was sanctioned during the previous year or two. Other cases revealed that the increases
occurred in response to unforeseeable political events such as financial crises or coup
attempts, which is consistent with previous findings (Table 5). Furthermore, gold purchases
by “active diversifiers” frequently coincided with political, economic, or financial shocks. This
lends credence to the notion that geopolitical events influence gold price movements and
may be linked to fears about future penalties (Arslanalp, Eichengreen, and Simpson-Bell
2023).
The shift to gold could have implications for the global economy. If more countries start to
hold gold, it could boost the price of gold and make it more expensive for countries to use
gold as a reserve asset.
There is an argument that, in the aftermath of Russia’s supply-side crisis and the sanctions
imposed on Russia, the world is transitioning from the Bretton Woods era, which was
backed by gold bullion, to Bretton Woods II, which was backed by inside money (treasuries
with unhedgeable confiscation risks), to Bretton Woods III, which was backed by outside
money (gold bullion and other commodities) (Pozsar 2022). The belief is that the Russian
sanctions create incentives for central banks to abandon the dollar in favor of gold and for
governments to cash in their dollar reserves for stocks of other commodities.
Overall, the recent sanctions against Russia highlight the importance of gold as a reserve
asset. It remains to be seen whether other countries will follow Russia’s lead and increase
their gold holdings.
TABLE 5: TOP 10 ANNUAL INCREASES IN THE SHARE OF GOLD IN RESERVES, 2000–2021
Increase in Increase
Gold Share in Gold
Country Year Concurrent Events (current or two preceding years)
(in ppt of Volume
reserves) (in percent)
Sanctions by the US (2018) and EU (2019); COVID-19

Turkiye 2020 21% 29%
pandemic (2020)
Belarus 2010 17% 57% Sanctions by Russia in 2010
A series of bomb blasts in 2000 before presidential

Lao PDR 2001 10% 328%
elections in 2001
Turkey 2017 9% 50% Coup attempt in 2016; constitutional referendum in 2017
Purchase of gold from IMF following the Global Financial

Sri Lanka 2009 8% 299%
Crisis
Paraguay 2012 8% 1,141% Sanctions by Mercosur and Unasur in 2012
Hungary 2021 8% 200% COVID-19 pandemic in 2020
Belarus 2006 8% 25% Sanctions by the EU and US in 2006
1997–98 Asian crisis; assassination attempts before

Sri Lanka 2000 7% 437%
elections in 2000
Belarus 2008 7% 33% Sanctions by the EU and US in 2006
Source: Arslanalp, Eichengreen, and Simpson-Bell 2023.

II. GOVERNANCE AND
STRATEGIC ASSET
CREDENTIALS OF GOLD
Central banks are responsible for managing a country’s monetary policy and financial
stability. One of their primary functions is to hold foreign reserves, which are assets held
in foreign currencies or other financial instruments, such as bonds and equities, for the
purpose of supporting a country’s economy and international transactions.
The investment principles of the financial institutions drive their asset allocation decisions.
When it comes to foreign reserves, central banks typically have three main objectives:
safety, liquidity, and return generation. According to the latest World Bank survey, the
majority of central banks—over 94 percent of the respondents—consider safety and liquidity
to be highly relevant principles. On the other hand, only one-third of the banks gave high
relevance to income generation or returns, while 65 percent considered it somewhat
relevant. Although central banks hold foreign reserves that are crucial for their financial
statements, generating returns is not as important to them as maintaining safety and liquidity
(Figure 5).
FIGURE 5: INVESTMENT PRINCIPLES OF THE CENTRAL BANKS
N=119
Source: Third RAMP survey on the Reserve Management Practices of Central Banks.
According to the preliminary results of the fourth RAMP survey (2023), 73 percent of the
central banks allowed investments in gold. Among the eligible investment options, gold
was more commonly allowed than inflation-indexed bonds, which were permitted by only
50 percent of the respondents. Additionally, almost all of the central banks surveyed were
eligible to invest in bonds, bank deposits, SSA securities, and money market instruments,
with percentages ranging from 87 percent to 95 percent (Figure 6).
On average, respondents allocated 8 percent of their portfolios to gold. It is worth noting

that although 60 percent of central banks hold gold in their reserve portfolios, only 20
percent include it as a part of their strategic asset allocation. The allocation of gold in central
bank reserve portfolios is usually not determined based on considerations of risk and return
or correlations with other asset classes. In some countries, the level of gold holdings is
influenced by historical factors or the need to purchase from local producers, which means
it is not considered in the optimization framework.
FIGURE 6: ELIGIBLE ASSET CLASSES OF THE CENTRAL BANKS
N=121
Source: Fourth RAMP survey on the Reserve Management Practices of Central Banks (preliminary results).
Gold has long been a mainstay in central bank portfolios because it delivers on these
investment principles. Historically, gold has long been the asset of choice, attracting safe
haven inflows during financial crises owing to its better performance as compared to
other traditional reserve assets. However, gold may not be a good asset from a capital
preservation perspective. Indeed, since reserves are valued either in dollars or domestic
currency, gold price can have significant volatility levels.
According to Baur and Lucey (2010), gold serves as an average hedge against equities
while also operating as a safe haven under extreme stock market situations. This safe
haven property is attributed to the positive skewness of gold returns, which contrasts with
the negative skewness observed in other asset classes (Lucey, Tully, and Poti 2006). Erb
and Harvey (2013), on the other hand, reject the safe haven hypothesis, citing data showing
that gold and stocks decrease together in 17 percent of the months, contradicting the notion
of gold as a genuine safe haven.
Van Vliet and Lohre (2023) report that a small allocation to gold can minimize the downside
risk of standard stock-bond portfolios, albeit at the expense of returns. Low-volatility
equities, on the other hand, can more efficiently minimize losses without compromising
returns. As a result, an allocation strategy that includes low-volatility equities in a mix of
stocks, bonds, and gold may benefit significantly by boosting the equity allocation while
decreasing the bond allocation.
Zulaica (2020) suggests that, due to the significant volatility of gold returns, only a modest
fraction of gold is quantitatively justifiable in most cases. However, evidence exists for gold’s
potential insurance value in adverse scenarios, which may support higher gold allocations in
cases where reserve management requires protection against tail risks.
CAP ITAL P RES ERVATIO N

Since the end of the gold standard and Bretton Woods, gold does not preserve capital due
to its price volatility. Nevertheless, there is evidence that including gold in a portfolio may
help mitigate potential losses during market downturns, as will be shown later.
Typical central bank portfolios predominantly consist of investment-grade fixed-income

instruments. Unfortunately, even the highest quality debt instruments are not entirely free
from credit risk. Over the last 40 years, the world has seen numerous instances of sovereign
debt defaults or restructurings (Figure 7) (Erce, Mallucci, and Picarelli 2022).
Also, when held in specific form and place, the gold has no credit, default, or political risk,
conditions that no other traditional safe haven asset can offer.
Gold’s liquidity surpasses the major financial assets and government debt markets of many
developed economies. In relative terms, it is more liquid than major sovereign debt markets.
Over the long term, gold provides returns comparable to equities outperforming the high-
grade fixed-income and other commodities. It also performs in periods of both financial
stress and growth. A notable characteristic of gold is its ability to perform during times of
crisis because the safe-haven investment flows it provides help spur gold price rallies.
FIGURE 7: DEFAULT EPISODES BY CONTINENT
Source: Erce, A, et al, 2022.

According to estimates, gold has outperformed both US Aggregate bonds and US equities
during five of seven significant crises. Additionally, during all periods of systemic risk, gold
has provided a positive return, with the exception of the dot-com bubble in the 2000s.
In particular, gold recorded its best performance during the aftermath of the 9/11 event,
with monthly returns averaging 6.9 percent, while US equities experienced a decline of
approximately 1.5 percent.
Furthermore, according to the World Gold Council (2022), gold has performed
advantageously when compared to US treasuries during recoveries subsequent to systemic
market selloffs. This data indicates that gold may serve as a valuable asset to investors
seeking to protect their portfolios against potential financial instability and volatility. Gold’s
ability to maintain positive returns during times of crisis and to outperform traditional
investment vehicles highlights its potential as a diversification tool and hedge against
market risk (Figure 8).
FIGURE 8: GOLD PERFORMANCE DURING CRISES
Source: Author's calculations based on monthly asset returns.

*Calculation based on the daily return. Dot-com bubble: 3/31/2000–3/31/2001; 9/11: 8/31/2001–9/30/2001; Great
Recession: 10/31/2007–2/27/2009; Sovereign Debt Crisis: 1/31/2010–10/31/2011; Brexit: 6/23/2016–6/27/2016;
COVID-19: 1/31/2020–3/31/2020; 2022 Pullback: 1/31/2022–12/31/2022.

TABLE 6: GOLD AS CAPITAL PRESERVATION ASSET 2000–2022
Gold US Bonds US Equities

Maximum drawndown -14.6% -6.5% -18.5%
Downside volatility 2.7% 1.1% 3.3%
Sortino ratio 0.24 0.14 0.09
Loss probability 53.3% 59.8% 60.9%

Value at risk -6.2% -2.8% -8.3%
Expected loss -9.0% -3.8% -10.1%
Minimum return -16.9% -5.5% -17.2%
Source: Author's calculations based on monthly returns.
On a stand-alone basis, gold exhibits a high level of risk compared to US bonds and
equities, thereby challenging its role as a portfolio value preservation asset. Nonetheless, it
presents relatively favorable performance compared to US equities based on several critical
metrics, such as maximum drawdown, where gold’s value at -14.6 percent is better than that
of US equities (-18.5 percent) (Table 6).
In addition, the downside volatility, measured by semideviation, is also high for gold,
standing at 2.7 percent, compared to 3.3 percent for equities and 1.1 percent for bonds, with
the Sortino ratio, which gauges the return per unit of downside volatility, at 0.24 for gold,
0.14 for bonds, and 0.09 for equities.
Although gold is generally considered riskier than bonds in terms of metrics such as value
at risk, expected loss, and minimum return, it compares favorably to equities. Notably, bonds
have a higher probability of loss, at 59.8 percent, compared to that of gold (53.3 percent)
but less than that of equities (60.9 percent). The preceding analysis demonstrates the
importance of viewing gold through the lens of its correlation with significant assets when
incorporating it in a reserve portfolio.
Gold can be a valuable countercyclical asset in a portfolio, as it has very little to no

correlation with other major asset classes (Figure 9). Since 1980, the correlation of gold
against the major asset classes averaged below 30 percent and even negative against the
S&P 500.
This percieved diversification effect can be misleading for the typical central bank portfolio
with predominantly fixed-income assets, since gold’s volatility is several magnitudes higher
compared to broad, high-grade US Treasury or US Aggregate benchmark indices. This
implies that unless the correlation between gold and these indices is negative or zero,
there will be no reduction in total portfolio risk by adding gold. In this scenario, the addition
of gold to a portfolio will lead to the substitution of risk from fixed income to gold and the
performance of the overall portfolio will heavily depend on the performance of the latter.

FIGURE 9: GOLD CORRELATION AGAINST MAJOR ASSETS
Source: Author's calculations.

Calculated from monthly return frequency data for 1980-2023. Data as of 16 Mar, 2023
Gold has become a popular investment asset due to its perceived ability to serve as a
hedge against economic and geopolitical uncertainties. The gold market is characterized
by a large-scale, liquid, and diverse source of demand, which makes it less volatile as
compared to some other major asset classes.
When we look at the rolling volatility of gold, it is found to be similar to the wider
commodities index, but smaller than major US and Emerging Markets (EM) Equity and Real
Estate indices, as depicted in Figure 10. This indicates that gold is relatively stable in terms
of its price fluctuations.
Moreover, gold tends to exhibit higher volatility compared to the broad spectrum of US
equities during relatively calm market conditions. However, during times of crisis, gold
prices remain stable and do not exhibit high correlation with equities and real estate. This
stability is primarily due the variety of sources of the demand for gold, such as investment,
jewelry, central bank reserves, and industrial applications. Therefore, shocks to one demand
source are less likely to significantly impact gold prices.

FIGURE 10: GOLD VOLATILITY AGAINST MAJOR ASSETS
Source: Author's calculation based on Bloomberg data

*500 day rolling period, daily return frequency. Data as of 22 Mar, 2023
Gold (BBG Gold USD Spot), Global Agg Bonds (BBG Agg TR index), US Treasury (BBG US Treasury index),
US Corporate Bonds (BBG US Corp Bonds index), EM Equities (MSCI EM index), US Equities (MSCI US index),
Commodities (BBG Commodities index), REITs (FTSE REITs index).
The latest empirical research establishes various optimal allocations to gold that can help
achieve central banks’ capital preservation objectives.
The distribution of gold allocations that will minimize risk varies for portfolios of SDR
government bonds with different durations. The distribution that minimizes portfolio volatility
in the two-year SDR fixed-income model portfolio is concentrated between 0 percent and 2
percent, but holding gold up to 4.75 percent may help reduce portfolio variation during very
implausible events (Zulaica 2020).
As the duration increases, the distributions become less skewed and tend to support higher
gold weights. The 10-year portfolio shows a more symmetric distribution, with allocations
to gold mostly in positive territory, with a suggested median share of gold in the reserve
portfolio around 22 percent. The results based on the VaR metric are similar, indicating that
gold holdings can help investors face tail-risk events better as the model portfolio becomes
more sensitive to yields. Investors with a higher tolerance for interest rate risk may find
greater diversification benefits in gold than investors with lower duration portfolios, both on
average and during tail events (Figure 11).

FIGURE 11: OPTIMAL GOLD ALLOCATIONS ACROSS 2-, 5-, AND 10-YEAR SDR PORTFOLIOS¹
Source: Zulaica, O., 2020.
According to research by Van Vliet and Lohre (2023), incorporating gold into a portfolio
can dramatically minimize downside risk. The best gold allocation in a portfolio is 10
percent, which, when combined with a 30/70 equity-bond mix, results in a 3.3 percent
downside volatility. This “gilded mix” has lower negative volatility than a 30/70 equity-
bond combination with bonds. A 10 percent gold allocation to a fixed equity-bond portfolio
reduces downside volatility by 0.3 percentage points, or 10 percent. Except for exceptionally
stock-heavy portfolios, when the proportional reduction in downside volatility is
approximately 15 percent, this conclusion holds over the whole range of stock-bond ratios.
As a result, gold has the potential to be a useful capital preservation asset in a portfolio.
L IQU IDITY CON S IDERAT IONS

According to the general economic theory, frictionless and well-functioning markets tend
to produce efficient outcomes that benefit consumers (Varian 1992). This is facilitated by
features such as low transaction costs, immediacy in execution, and the ability to execute
large transactions without significantly impacting prices. The Committee on the Global
Financial System (CGFS 2014) defines market liquidity as the ability to execute large
transactions quickly with minimal price impact, meaning that recent transactions should not
have a significant effect on the overall market price in deep and liquid markets.
Gold is liquid across various investment platforms. According to the latest World Gold
Council data on Q1 2023, the average daily trading volume is spread between over-the-
counter (OTC) markets (US $97bn), open interest through derivatives traded on various
exchanges (US $64bn), and gold ETFs (US $2bn) (Figure 12).

FIGURE 12: GOLD LIQUIDITY SOURCES
Source: WGC data.

*Daily average trading volume for Q1 2023.
The liquidity of the gold market is comparable to the Treasury bills, US Agency MBS and
ABS, all traded stocks in S&P 500 with the average trading volume at around US$164 billion
per day in 2022 (Figure 13). The liquidity is higher than most of the major financial markets
such as the Dow Jones Industrial Average, UK and German bonds, and US corporate
bonds. Physical gold holdings by investors and central banks are estimated to be worth
$4.9 trillion, with an additional $1.2 trillion in open interest through derivatives traded on
exchanges or the (OTC) market.
FIGURE 13: GOLD LIQUIDITY AGAINST MAJOR ASSETS

IN US$ BILLIONS
Source: Author's calculation based on BIS, SIFMA, UK DMO, WGC data.

*Daily average trading volume for Q1 2023.

Liquidity is a multidimensional concept that can be measured in different ways depending
on the capital market segment being considered. For example, the bid-ask spread has
traditionally been a more suitable measure of liquidity differences across quote-driven
markets such as gold and some of the largest assets, as demonstrated by Gabrielsen,
Marzo, and Zagaglia (2011) and Fleming (2003).
Compared to other major asset classes, such as stocks, bonds, and currencies, the bid-ask
spread for gold is relatively high. This is due to several factors, including the relatively low
liquidity of the gold market compared to other asset classes, as well as the high cost of
storing and transporting physical gold. However, when scaled by price, as suggested by
Choi (1988), the bid-ask spread of the gold is relatively low compared to the major asset
classes (Figure 14).
The bid-ask spread of gold exhibits similarity with highly liquid forex pairs, such as EURUSD,
USDJPY, and GBPUSD, while showing a marginal difference when compared to the bid-ask
spread of the US 2-year and 10-year Treasury bonds. However, when compared to the bid-
ask spread of Oil and S&P 500 Index (ETF), the spreads of gold are notably lower.
FIGURE 14: GOLD BID-ASK SPREAD COEFFICIENT AGAINST MAJOR ASSETS
Source: Author's calculation based on Bloomberg data.

*Based on 50-day moving average of spread coefficient (bid-ask spread scaled to price).
The implementation of quantitative easing by advanced-economy central banks has

prompted a quest for alternative safe havens, such as gold (Gopalakrishnan and Mohapatra
2018). This may help explain why emerging and developing economies (EMDEs) have
continued to increase their gold reserves, even after the financial crisis had peaked.

The analysis provides compelling indications that the rise in EMDE gold holdings during
the post-crisis era is closely linked to the significant expansion of the balance sheets of
advanced-economy central banks and the consequent surge in global liquidity. Notably,
this post-crisis effect endures even after factoring in various country-specific variables,
fluctuations in global gold prices, and global risk.
Gold trading volumes are sensitive to central banks’ actions to stimulate their financial
markets and economies in times of crisis. Particularly, investment demand for gold,
and hence the trading volumes, have been heavily affected by the Federal Reserve’s
interventions. Gold trade volumes and investment demand have historically increased
during periods when the Federal Reserve undertook their market operations (Figure 15),
with safe haven flows contributing to gold’s liquidity.
Against the backdrop of the banking crisis in the US and Europe, gold is expected to
become the main defensive asset, and its liquidity stands to benefit from the expected
bailout of the banking sector at the cost of an infusion of hundereds of billions of dollars
from the Federal Reserve (MENA Report 2023).
FIGURE 15: GOLD INVESTMENT DEMAND VS FED INTERVENTIONS

*Weekly data 11/7/2003-3/10/2023.

R E T URN CON S IDERATION
Gold has proven to be a reliable and stable investment over the medium and long term.
Since the fall of the “gold standard” in 1971, gold has delivered an average annual return of
around 11 percent, with a compounded annual growth rate (CAGR) of 8 percent. One reason
it can deliver stable returns is the diversity of its demand sources. Gold is not only used
as a store of value or medium of exchange, it also has various industrial and technological
applications, ensuring that its value does not depend solely on its use as a store of value.
Although gold has the significant drawback of gold earning no interest return, if effectively
managed, gold holdings can nonetheless generate positive returns in a rising market
(Astrow 2012).
When compared to other major asset classes, such as equities, bonds, and real estate,
gold has shown impressive performance over the long term, outpacing bonds and real
estate. This makes it an attractive investment option for those looking to diversify and
to hedge against economic uncertainty (Figure 16). Over the 5-year and 20-year time
horizons, gold performs similarly to US equities, significantly outperforming against other
major asset classes. Over a 10-year horizon, gold returned on par with US corporate bonds
and significantly lower than US equities, but it still outperformed all other major assets. It is
crucial to acknowledge that the additional return associated with gold investment entails
considerable volatility, necessitating careful consideration when making investment decisions.
FIGURE 16: GOLD RETURN OVER VARIOUS TIME PERIODS

*Based on quarterly asset returns. The fixed income and equity returns are estimated from respective total return indices.

Gold has been widely acknowledged as a preferred asset for hedging against inflation.
Ghosh (2016) contends that the allocation of gold in reserve holdings is positively
associated with volatility in exchange rates and inflation. Arslanalp, Eichengreen, and
Simpson-Bell (2023) similarly establish that the level of inflation is the most significant
determining factor influencing the share of gold in reserves of emerging and developing
economies (EMDEs).
Gold offers positive real returns during periods of low, moderate, and high inflation (Figure
17). Notably, aggregate US Treasuries produced positive real returns only during periods of
low inflation, whereas broad US equities, while offering high returns during periods of low
and moderate inflation, typically suffer from large losses when inflation exceeds 3 percent
on a consistent basis.
Gold’s performance in a high inflation environment is unsurprising; however, it is worth

investigating gold’s ability to generate high returns in a low inflation environment. This is
primarily due to increased investment demand for gold as a safe haven asset during the
period of low inflation, which is often characterized by low interest rates and financial stress.
FIGURE 17: GOLD RETURN OVER VARIOUS INFLATION LEVELS

*As of 31 December 2022. Based on monthly nominal returns for gold USD spot price, Bloomberg US Treasuries
Agg, MSCI US Equities and YoY US CPI since February 2003.
The low interest rate environment also reduces the opportunity cost of holding gold as
a non-return-generating asset. Under these conditions, investors prefer to increase their
holdings of gold over US Treasuries, as the latter become less appealing due to the lower
carry earned by holding it.

Under the negative interest rate environment, as experienced by the EUR, JPY, and CHF
investors, gold’s appeal becomes more pronounced (Figure 18). This is because if the
investor must pay interest to hold the risk-free asset, allocating funds into gold, which costs
nothing to hold and yet offers potential capital gains, becomes an attractive option.
The negative yield environment was also accompanied by quantitative easing (QE)
measures by central banks looking to improve financial conditions and foster economic
growth. This condition, combined with the increasing money supply and low-to-negative
interest rate environment, allowed gold to outperform US Treasuries.
FIGURE 18: GOLD RETURN VS NEGATIVE YIELDING DEBT
Another important factor to consider when evaluating gold’s potential for return is its
performance over various business cycles. Empirical data show that business cycles
affect gold returns asymmetrically, with these returns responding more strongly during the
recessionary than the booming phases of the cycle (Apergis and Eleftheriou 2016). Business
cycles of the stock markets are countercyclical compared to the business cycles of gold
investments (Chirila and Chirila 2012).
Since Q1 1990, only gold and bonds have consistently generated positive real returns above
the US long-term average inflation target rate of 2 percent (Figure 19).
Equities and real estate are expected to outperform other asset classes during the early
growth cycle but to fall short during the recessionary period. It is worth noting that the
performance of US equities during the recessionary period is skewed by their exceptional
performance during the COVID-19 pandemic, as aggressive rate cutting by the Federal

Reserve and accumulation of savings in the United States following economic relief from
the US government spurred excessive investment into stocks, which is unusual during a
recession.
Excluding the performance during the pandemic, the average annual return on US stocks
during recessionary cycles is -11 percent. Bonds are an asset to invest in throughout the
four economic cycles, particularly during times of financial distress, when they outperform
all other asset classes. However, they tend to lag riskier assets when the economy is
beginning to recover and when it is nearing the end of its cycle.
FIGURE 19: GOLD RETURN ACROSS BUSINESS CYCLES
*All data from Q1 1990–Q4 2022. The economic cycles are based on internal formula-based model developed by
World Bank Treasury considering the level, trend, and behavior of other indices and macroeconomic data. The
performance of the asset classes in the different cycles is calculated as the annualized mean quarterly return of
each asset in the identified cycles.
Gold’s consistent performance across all four business cycles suggests that it can be
viewed as both a defensive and a growth asset, performing well during both market stress
and economic growth.
Considering typical central bank portfolios predominantly invested in fixed-income products

invested in currencies comprising the SDR basket, a higher allocation to gold increases the
uncertainty around such portfolios’ expected returns.
By examining ratios of expected return relative to a selected risk metric, it is possible to

integrate considerations of both risk and return. In particular, in the case of a portfolio with
short-duration SDR government bonds, risk-adjusted returns exhibit a positive relationship
with gold portfolio weights only for very small weights, whereas returns decline steeply

for higher weights, particularly those exceeding 10 percent. The return generated per unit
of risk is maximized at a weight that falls slightly below 2 percent for both cases (Zulaica
2020).
However, the optimal gold allocation that maximizes a portfolio’s return to volatility ratio
differs for investors with longer-duration portfolios. As the willingness to bear interest rate
risk gets higher, the optimal share of gold in the portfolio increases (Figure 20). For instance,
the estimated optimal allocation to gold for the investor with a portfolio duration of 10 years
is around 13 percent.
FIGURE 20: OPTIMAL GOLD ALLOCATION ACROSS VARIOUS CRITERIAS
Source: Zulaica 2020.
For investors who possess a higher risk appetite and maintain a longer investment horizon,
such as pension funds, sovereign wealth funds (SWFs), endowments, and certain central
banks with multi-asset portfolios, gold may serve as a highly effective diversification tool.
The optimal allocation of gold that maximizes the Sharpe ratio for these investors may vary
within the range of 7 to 10 percent, depending on the chosen allocation of portfolio assets,
including equities, bonds, and alternatives, and based on the asset’s returns over the last
two decades (as depicted in Figure 21). However, an analysis based on a lower expected
average annual gold return of 4.5 percent reveals that the optimal proportion of gold across
portfolios may range from 2 to 4 percent. The same conclusion is applicable to investors
who possess inflation-hedging assets, such as inflation-linked bonds, as well as those who
hold alternative assets like real estate, private equity, and hedge funds.

FIGURE 21: OPTIMAL GOLD ALLOCATION ACROSS VARIOUS PORTFOLIO ALLOCATIONS
G OLD P ERFORMA N CE ACROSS INST IT UT IONAL PORT FOLIOS

The impact of adding gold to institutional portfolios can be analyzed on the basis of three
stylized portfolio compositions (Figure 22). Portfolio 1, with a very high allocation in high-
quality US Treasuries, can be attributable to central banks with conservative portfolios, who
are primarily concerned about the liquidity and capital preservation of their assets. Portfolio
2 illustrates both conservative and diversified fixed income portfolio pursuing return
generation on top of its primary objectives and investing in assets such as international,
corporate, and credit bonds, yet still maintaining a sizable allocation in US Treasuries. The
third example, Portfolio 3, shows a sample pension fund/SWF/endowment portfolio with a
long-term investment horizon and aiming to generate high return and fund future liabilities.
The historical performance of the portfolios will be backtested by adding 10 percent and 20
percent gold into each portfolio with the objective of analyzing whether the gold allocation
would have improved the risk/return characteristics of the portfolio and its drawdowns
during the periods of financial distress to help achieve institutional goals of holding
reserves.

FIGURE 22: STYLIZED PORTFOLIOS OF VARIOUS INSTITUTIONS
EM CENTRAL BANK PORTFOLIO (PORTFOLIO 1)
The performance of Portfolio 1 with 10 percent and 20 percent gold allocations (Table 7)
was backtested using the historical asset returns for Q1 2000 to Q1 2023, with the particular
interest paid to how the respective portfolios would have performed during some of the
crises that occurred during this period.
TABLE 7: PORTFOLIO 1 WITH GOLD ALLOCATION
Gold Allocation
Asset Base
10% 20%
Gold - 10% 20%
Cash 5% 5% 5%
US Treasuries 95% 85% 75%
The addition of gold to the base portfolio would have resulted in a deterioration in most of
the performance metrics aside from Sortino and diversification ratio, and the percent of the
positive return periods. The portfolios with higher gold allocations experienced larger losses
and higher volatility. Risk-adjusted measures such as the Sharpe ratio and Sortino ratio also
worsened with higher gold allocations. While gold improved diversification to some extent,
it resulted in lower returns and increased downside risk (Table 8). Also, the falling VaR and
conditional VaR (CVaR) values are a clear indication that a central bank primarily concerned
with safety irrespective of returns should be cautious when adding gold into the asset mix.

It is important to note that it is not appropriate to make decisions when the risk-adjusted
metrics such as Sharpe ratio are negative (Sharpe, 1994).
TABLE 8: PERFORMANCE OF PORTFOLIO 1 WITH GOLD ALLOCATION (Q1 2000–Q1 2023)
Portfolio 1 Portfolio 1
Metric Portfolio 1
(10% gold) (20% gold)
Annualized return -3.9% -7.7% -11.5%
Annualized standard deviation 4.3% 4.7% 5.5%
Max. drawdown -5.5% -6.6% -7.7%
Sharpe ratio -1.19% -1.91 -2.32

Sortino ratio -0.33 -0.30 -0.26
Diversification ratio 1.05 1.23 1.27
Historical value-at-risk (5%) -1.7% -1.9% -2.3%
Conditional value-at-risk (5%) -2.7% -2.7% -3.0%
Positive periods 57% 61% 62%
Lastly, the percentage of positive periods, representing the proportion of periods in which
the portfolios generated positive returns, shows a slight improvement with increasing gold
allocation.
Incorporating gold into the portfolio would not have provided substantial protection during
recent crises (Table 9). In fact, it would have resulted in larger drawdowns, indicating that
gold’s historical role as a safe haven asset may not hold true in all market downturns.
Investors should carefully assess the effectiveness of gold as a hedge and consider its
potential impact on portfolio performance during specific crisis periods.
TABLE 9: PERFORMANCE DURING RECENT CRISES
Gold Allocation
Asset Base
10% 20%
Subprime crisis -7.9% -8.9% -10.1%
Brexit -2.4% -3.0% -3.6%
COVID-19 pandemic -5.9% -6.4% -6.9%
The Markowitz optimization framework can be used to determine the best gold allocations
to fulfill the given goals that public institutions frequently pursue. The study is carried out

with the specific constraint of a maximum 5 percent allocation to cash to avoid the corner
solutions typical of this form of optimization. According to the findings, a 95 percent gold
allocation is necessary to maximize the portfolio Sharpe ratio, whereas no gold allocation
is recommended to minimize variance or cVaR. A 12 percent allocation to gold maximizes
portfolio diversification (Table 10). When deciding on the gold allocation in such a portfolio,
investors should consider these criteria in light of their risk-return preferences.
TABLE 10: GOLD WEIGHT IN THE PORTFOLIO TO ACHIEVE SPECIFIC CRITERIA
Criteria Gold Weight

Maximum Sharpe ratio 95%
Minimum variance 0%
Minimum cVaR 0%
Maximum diversification 12%
DM CENTRAL BANK PORTFOLIO (PORTFOLIO 2)
Central banks with more advanced investment capabilities typically focus on generating
returns and invest more in riskier fixed-income products, such as global or corporate bonds
and SSAs, while maintaining a high allocation in US Treasuries (Table 11).
Gold Allocation
Asset Base
10% 20%
Gold - 10% 20%
Cash 5% 5% 5%
US Treasuries 70% 70% 70%
Global bonds 15% 10% 5%
US corporate bonds 5% 5% -
US credit bonds 5% - -
Diversification into gold in a such portfolio would result in a deteriorating performance

similar to that observed in Portfolio 1 (Table 12). The portfolios with higher gold allocations
demonstrate a fall in performance, including lower returns, higher risk, and decreased risk-
adjusted metrics. Additionally, both the historical value-at-risk (VaR) and conditional VaR

values increase with higher gold allocations, indicating higher potential losses. Despite some
improvement in the diversification ratio, the overall impact of incorporating gold into Portfolio 2
appears to be negative, resulting in lower risk-adjusted metrics and increased downside risk.
Metric Portfolio 2
(10% gold) (20% gold)
Max. drawdown -4.8% -6.2% -7.5%
Sharpe ratio -0.77 -1.67 -2.23

Sortino ratio -1.04 -0.98 -0.89
Similar to Portfolio 1, the inclusion of gold did not effectively mitigate drawdowns in portfolio
value across all three periods. In fact, portfolios with higher gold allocations experienced
worse performance during the crises (Table 13).
Gold Allocation
Asset Base
10% 20%
Subprime crisis -7.2% -8.6% -10.0%
Brexit -2.7% -3.2% -3.7%
COVID-19 pandemic -6.9% -7.0% -7.1%
As suggested by the Markowitz optimization process, no allocation to gold is necessary to

meet the criteria of maximizing the Sharpe ratio, minimizing variance, or minimizing cVaR.
However, a gold weight of 9 percent is recommended to maximize diversification in the
portfolio (Table 14). This suggests that adding a small allocation of gold can contribute to
portfolio diversification without affecting risk-adjusted performance. Investors can consider
this guideline when determining their gold allocation based on their diversification goals.

Minimum variance 0%
Minimum cVaR 0%
PENSION FUND/SWF/ENDOWMENT PORTFOLIO (PORTFOLIO 3)
The investors with higher risk tolerance and longer investment horizons, such as pension
funds and SWFs that can afford to have risky assets in their portfolio, would typically invest
more into domestic and foreign equities and various types of alternative asset classes
(Table 15).
Gold Allocation
Asset Base
10% 20%
Gold - 10% 20%
US Aggregate bonds 30% 30% 30%
US stocks 50% 45% 40%
EM stocks 15% 10% 10%
REITs 5% 5% -
The addition of gold to such investors’ portfolios is more advantageous than the addition of
gold to the portfolios of investors with shorter investment horizons and lower risk tolerance.
The portfolios with higher gold allocations demonstrate mixed results. While the 10 percent
gold allocation leads to a slightly better annualized return compared to the base portfolio,
the 20 percent gold allocation shows a further decline. Risk-adjusted measures, such
as the Sharpe ratio and Sortino ratio, also exhibit mixed outcomes, with the 10 percent
gold allocation showing a slightly better Sharpe and Sortino ratio. The diversification
ratio improves with higher gold allocations, suggesting increased diversification benefits.
However, the historical and conditional value-at-risk values rise with higher gold allocations
(Table 16).

Metric Portfolio 3
(10% gold) (20% gold)

Max. drawdown -4.7% -8.5% -8.5%
Sharpe ratio -1.59 -0.61 -1.27

Sortino ratio -0.71 -0.28 -0.32
The inclusion of gold resulted in mixed outcomes for the portfolio drawdowns during the
periods of recent market distress. During the Subprime Crisis, the portfolio with a 10 percent
gold allocation experienced a significant decline of -20.3 percent, while the portfolio with a
20 percent gold allocation saw a slightly smaller decline of -18.7 percent. However, during
Brexit, 20 percent gold allocation performed slightly better than the base portfolio, with
smaller losses recorded. Amid the COVID-19 pandemic, neither gold allocation provided
the desired level of protection, resulting in greater losses compared to the base portfolio.
Overall, gold demonstrated very small potential as a risk mitigator during crises, although its
effectiveness varied depending on the specific event and allocation (Table 17).
Gold Allocation
Asset Base
10% 20%
Subprime crisis -10.0% -20.3% -18.7%
Brexit -2.3% -2.5% -1.9%
COVID-19 pandemic -9.0% -13.5% -12.6%
According to the Markowitz optimization process, the allocation to gold should be 18

percent to maximize the Sharpe ratio. Conversely, if the objective is to minimize the
portfolio’s conditional value-at-risk (cVaR), a measure of extreme downside risk, the

recommended gold weight increases to 32 percent. This higher allocation to gold is
intended to mitigate potential losses during adverse market conditions. On the other hand,
for investors seeking maximum diversification benefits, a 10 percent investment in gold
is advised. These recommendations provide guidance for investors to adjust their gold
allocation based on their specific risk and return objectives (Table 18).

Minimum variance 0%
Minimum cVaR 32%
P R O S P ECTIV E A N A LYS I S: INVE ST IGAT ING ALT E RNAT IVE

SC E NA RIOS
The design of macroeconomic scenarios depends on expectations about inflation, future
interest rates, and fiscal and monetary measures. This section evaluates the expected
performance of the stylized EM central bank portfolio (Portfolio 1) under three scenarios from
Oxford Economics (OE) based on their Global Economic Model as updated November 30,
2022.
1. H
ousing market crash: Rising interest rates and unemployment cause a sharp
drop in house prices, leading to a severe global recession. Residential investment
and consumer spending decline as credit conditions tighten and investor sentiment
worsens. Initially, central banks remain cautious with policy rates, resulting in minimal
economic growth in 2023. The recovery in 2024 is slow but improves later due to
looser monetary policy and some revival in housing and financial markets.
2. H
igh inflation regime: The credibility of central banks is at risk due to high inflation.
Despite efforts to raise interest rates, inflation expectations remain unanchored, leading
to continued high costs and prices. Financial markets experience turmoil, with global
monetary policy tightening, government bond yields rising, and stock prices falling.
This leads to a stronger US dollar and a slowdown in the global economy, affecting
households’ disposable income. Economic growth is weak, with prolonged high
inflation, inflation expectations, and policy rates.
3. E
nd of supply chain crisis: Inflation eases and supply chains normalize faster than
expected. China shifts away from a zero-COVID policy, aiding the process. Commodity
market disruption is limited. Producer prices decrease, boosting sentiment. Equities

rise, bond yields fall, and currencies appreciate. Confidence improves, supporting
demand recovery. Central banks remain cautious, keeping policy rates steady. Lower
inflation allows for looser policy. The global economy grows 2.1 percent in 2023 and 3.8
percent in 2024.
During a high inflation regime, USD cash may provide some protection against inflation, but
gold tends to be considered a safe-haven investment. Gold’s value often increases during
inflationary periods, making it an attractive option. The US Treasury Aggregate, representing
a portfolio of US government bonds, may offer a lower return compared to cash and gold in
this scenario as increasing interest rates negatively impact most fixed-income assets (Figure
23).
When a supply chain crisis ends, interest rates for all three investments decrease. USD
cash remains relatively stable, while gold retains its appeal as a stable investment during
recovery periods. The US Treasury Agg may become more favorable as the crisis resolves,
potentially offering higher returns.
In the case of a housing market crash, USD cash tends to hold its value and can be seen as
a reliable option during market downturns. However, gold’s value may decline during such
crises, making it less favorable. The US Treasury Agg may become an attractive investment
during a housing market crash, potentially offering higher returns compared to cash and
gold.
It’s important to note that these general behaviors are based on the hypothetical scenarios
provided and may not necessarily reflect actual market conditions.
FIGURE 23: THREE-YEAR ANNUAL EXPECTED RETURNS
Source: Authors’ calculations using World Bank Treasury’s in-house developed software, Asset Allocation
Workbench (AAWB), based on OE and WGC scenarios.

In the high inflation scenario, portfolios with higher gold allocations show the potential for
increased returns. However, this comes with higher volatility and increased downside risk.
As the gold allocation increases, the probability of negative returns decreases (Table 19).
TABLE 19: THREE-YEAR PORTFOLIO 1 PERFORMANCE
High Inflation Regime End of Supply Chain Crisis Housing Market Crash
Portfolio Probability Probability Probability

CVaR CVaR CVaR
Expected of Expected of Expected of
Volatility Return Volatility Return Volatility Return
Return Negative Return Negative Return Negative
(95%) (95%) (95%)
Returns Returns Returns
Portfolio 1 9.2% 4.3% 0.5% 1.7% 14.5% 4.8% 4.9% 0.1% 16.8% 5.0% 6.8% 0.1%
Portfolio 1 11.2% 4.8% 1.8% 0.7% 15.7% 5.2% 5.5% 0.1% 14.3% 5.2% 4.1% 0.3%
(10% gold)
Portfolio 1 13.3% 6.7% 0.0% 1.8% 16.9% 7.1% 3.0% 0.5% 11.8% 6.8% -1.6% 4.0%
(20% gold)
Source: Authors’ calculations using World Bank Treasury’s in-house developed software, Asset Allocation
Workbench (AAWB), based on OE and WGC scenarios.
During the end of a supply chain crisis, portfolios with varying gold allocations demonstrate
higher expected returns compared to the base portfolio. However, the higher gold
allocations also lead to increased volatility and risk, albeit with a low probability of negative
returns.
In the housing market crash scenario, the base portfolio without gold allocation shows
a high expected return and low probability of negative returns. However, portfolios with
higher gold allocations experience lower expected returns, increased volatility, and higher
CVaR values. The probability of negative returns also varies across portfolios.
Overall, adding gold to the portfolio has the potential to enhance returns in specific
scenarios, but it comes with increased volatility and risk. The trade-off between returns, risk,
and the probability of negative returns should be carefully considered based on individual
investment goals and risk tolerance.

III. PORTFOLIO MANAGEMENT
STA NDA RDS
Gold standards are formed at the major global trading centers, where most institutional
investors trade. The London OTC market, the COMEX US Futures market, and the Shanghai
Gold Exchange (SGE) account for more than 90 percent of gold’s wholesale trading volumes
(see Table 3).
Investors in the London OTC market trade 400 troy ounce “Good Delivery” bars (LGD)
housed in the vaults of London Precious Metals Clearing Limited (LPMCL) members and
the Bank of England. The London OTC market, being the world’s largest trading center,
establishes the LBMA (London Bullion Market Association) Gold Price twice daily as the
global reference standard for gold (see Table 20).
Most of the gold trades at COMEX, the

second largest gold market, concentrate
The following are required of refiners seeking
on the nearest active futures contract, accreditation from the Good Delivery List:
which is primarily cash settled and strongly
1. To have existed for at least five years and
linked to physical gold via the exchange for
undertaken active gold production for not
physical (EFP) market. The usual COMEX less than three years.
bars allowed for physical settlement are 100
2. To produce a minimum of 10 tonnes of
oz, 1 kilo, and, most recently, London Good
gold per annum.
Delivery bars from exchange-approved
refiners. o have tangible net worth of at least £15
3. T
million.
Gold is imported into the Chinese domestic
4. T
o produce gold bars weighing between
market by 13 licensed banks, including 350 and 430 fine troy ounces (oz) and with
HSBC, ICBC, and the Bank of China. All a fineness (minimum quantity of gold in
“standard gold” bullion imported by the 13 the bar) of 99.5%.
banks must be cast by an LBMA or SGE 5. To satisfy the Due Diligence tests
approved refinery in bars or ingots of 50 gr, and implement LBMA’s Responsible
100 gr, 1 kg, 3 kg, or 12.5 kg, with a fineness Sourcing Programme requiring refiners
to demonstrate their efforts to combat
of 9999, 9995, 999, or 995, before it can
money laundering, terrorist financing, and
be traded through the SGE system. The human rights abuses and to respect the
bars can be used to settle futures contracts environment globally.
on the Shanghai Futures Exchange (SHFE).

TABLE 20: THE GOLD STANDARDS REQUIRED BY MAJOR TRADING HUBS
COMEX Futures
Contract London OTC Market SGE and SHFE
Market
50 g, 100 g, 1 kg, 3
400 oz gold bar; 100 oz gold bars; 1
Deliverable Product kg, or 12.5 kg gold
1 kg bar kg bar; 400 oz bar
bars
99.5%, 99.9%,
Mininum fineness 99.5% 99.5%, 99.99%
99.95% and 99.99%
Bars from LGD Exchange approved
Brands “Standard bars”
brands brands
Facilities location London New York, Delaware Shanghai
Source: CME Group, LBMA, SGE.
T R ADIN G
As a trading commodity, gold can be traded through various channels, including exchanges,
physical dealers, and over-the-counter (OTC) markets. On exchanges such as the COMEX and
the Shanghai Gold Exchange (SGE), gold futures contracts and spot contracts are traded by
investors and industry players. Physical dealers, such as jewelry shops and bullion dealers,
offer physical gold in the form of bars, coins, and jewelry for purchase by retail customers.
OTC markets, on the other hand, are decentralized and allow for customized transactions
between buyers and sellers, with prices negotiated based on current market conditions.
In the London OTC market, the largest gold market by volume, gold is traded via bilateral
agreements with bullion banks for Loco London Unallocated gold (Loco London refers to
gold bullion that is physically held in London vaults to underpin the trading activity in this
market). Spot trades are typically priced in USD/oz on a T+2 settlement basis. This price is
commonly used as a benchmark for the gold price and gold prices in other markets, which
are typically quoted on a discount/premium over the Loco London gold spot price.
Trading is typically conducted via electronic platforms provided by bullion banks or trading
platforms such as Bloomberg, Refinitiv, and others. For example, trading on Bloomberg
or Refinitiv is executed via chat, where traders interact directly with the bullion bank (see
“Example of an unallocated gold buying deal with a bullion bank on spot basis”); through the
dealer-to-client automated electronic trading system (FXTG, FXall), where gold trading takes
place in standardized sizes (usually 1,000 oz) based on automatic quotes from the bullion
banks; or in semi-automated trade execution systems (RFQ), where traders ask for quotes
via a specialized interface from one or more bullion banks.
The most common ways of buying gold are through purchases in OTC market, from local
production, or through ETFs. Gold is traded in the OTC market in standard bars produced
by refiners on the London Gold Delivery (LGD) list. Gold can be purchased through the
bullion bank in allocated or unallocated form.

According to IMF (BMP 6) reserve reporting requirements, gold can be held on an allocated or
unallocated basis.
An allocated account is backed by a specific bar of the precious metal, so that the investor
would not see a simple credit on their account but instead a weight list of bars, plates, or ingots
showing the unique characteristics of the metal. This form is analogous to a safe deposit box,
with the account operator simply acting as custodian.
An unallocated account is analogous to a currency/checking account held with a bank for a

currency and reflects a debit or credit over an account rather than a specific bar. According to
LBMA, over 90% of the gold traded in OTC markets clear via unallocated accounts.
Owners of the accounts must pay a maintenance fee for their unallocated account or a storage
fee for their allocated account. Charges vary between account operators.
In both allocated and unallocated accounts, the metal itself is traded, with the designations
allocated and unallocated referring only to the post-trading settlement mechanism.
An important consideration for unallocated gold is that the account owner is exposed
to the custodian’s creditworthiness, while allocated accounts are free from credit risk.
Nevertheless, neither form is free from political risk unless the allocated gold is held in the
domicile country.
After the custodian accounts are set up, gold can be purchased from a bullion bank in the
OTC market. Like a foreign exchange transaction, the procedure for purchasing gold does
not require signing or conducting any special legal agreement. The buyer simply requests
the bullion bank to quote to sell the desired amount of gold against the currency of choice
(usually USD or EUR) on a spot basis (T+2). The gold is usually traded in smaller lots (e.g.,
1,000 oz, 5,000 oz, or 10,000 oz), as larger orders can affect the spot price of the gold and
delay efficient execution of the order by the bullion bank, depending on the liquidity at the
time of trade.

G OLD TRA DIN G TH ROUGH E XCHANGE S
After the London market, the CME Group’s COMEX derivatives exchange has become
an increasingly important venue for driving price discovery. The market is tightly linked to
physical markets, and a growing share of its volume is traded during Asian market hours.
COMEX gold trading takes place through three types of futures contracts, which can be
settled with cash or physically. The contract types are differentiated to accommodate gold
complying with different standards: typical COMEX 100 oz bars, LGD 400 oz bars, and
Chinese 1 kg bars. The trade in the exchange is executed with the assistance of accredited
brokers who have direct access to COMEX trading platforms. The settlement of the trades
is done using the deliverable gold (Table 21) from the approved brands, which includes
more than 100 refiners across the world.
TABLE 21: CME GROUP—DELIVERABLE PRECIOUS METALS PRODUCTS
Gold (Enhanced Gold Kilo Futures

Contract Gold Futures (GC)
Delivery) (4GC) (GCK)
100 oz gold bar; 100 oz gold bars;
Deliverable Product 1 kg gold bar
1 kg bar 1 kg bar; 400 oz bar
1 x 100 oz bar or
3 x 1 kg bar or
1 x Accumulated
Number required per 1 x 100 oz bar or
Certificate of 1 x 1 kg bar
contract 3 x 1 kg bar
Exchange (each 400
oz bar equivalent to
4 ACEs)
12.5% lower and
7.5% higher than
Weight tolerance ±5% contract size (±5% N/A
tolerance applies to
100 oz gold bars)
Minimum fineness 995 995 9999
Exchange approved Exchange approved Exchange approved
Brands
brands brands brands
Facilities location New York, Delaware New York, Delaware Hong Kong
Source: CME Group.
Historically, LGD bars were ineligible for COMEX futures settlement; however, following
logistics disruptions caused by COVID-19, Gold (Enhanced Delivery) (4GC) contracts were
introduced in 2020 to accommodate gold from London vaults. The gold must be stored in
one of the accredited warehouses, and the beneficiary owner is provided with the receipt
(warrant), which can be converted into Accumulated Certificates of Exchanges (ACEs) at the
rate of a 400 oz bar warrant equaling 4 ACEs. The ACEs are then used to settle the futures
trades when they are physically settled (Figure 24). It takes three business days to complete
the delivery process.

FIGURE 24: GOLD (ENHANCED DELIVERY) FUTURES–DELIVERY PROCESS
Source: CME Group.
This gives the participants—the seller, the buyer, their respective clearing firms, and the
CME Clearing—time to make the necessary notifications and arrangements.
Because deliveries take place between clearing firms acting as agents for those having
accounts with them, clearing firms play an important role in the delivery process. Contract
deliveries are not made directly between account holders.
In addition to these primary trading centers, the global gold market is supported by a
number of secondary markets: China (SGE & SHFE), Dubai, Hong Kong, India, Japan, and
Singapore. These markets provide a variety of spot trading options or listed contracts, but
they do not attract the same level of liquidity that the primary trading centers do.
Despite their lower liquidity, these secondary markets are critical to the global gold market.
They meet local needs and serve as regional trading hubs.
G OLD IN V ESTMEN TS AND LIQUID IT Y MANAGE M E NT

Gold can be invested in term deposits to earn a return. Normally, the tenor of the deposit
must be long (e.g., six months or more) to generate a return sufficient to cover the storage
costs of gold. Term deposits usually necessitate signing a legal agreement in the form of a
nonstandardized Precious Metals Lending Agreement.

Example of the Loco London unallocated gold deposit deal with the bullion bank.
The confirmation and settlement of the trade

GOLD LENDER: Hi friends. Would like to is similar to the unallocated gold trading/
deposit 10,000 oz Loco London gold to 6 settlement procedure (the deposit confirmation
month. Please quote your best. is done through SWIFT MT620 message).
BORROWER: Sure. 50bp. Basis Price 2015 At maturity, the depositor receives 10,000 oz
USD/oz. gold plus Interest $50,375 ((10,000z*US$2015*
GOLD LENDER: Done 0.0050*180)/360).
GOLD LENDER: To confirm I deposit XAU

10,000 oz at 50bp (bp - 2015 USD/oz).
Tenor - Feb 5, 2022 - Aug 5, 2022.
At maturity my USD to our account with
"XXX". My XAU to our account with "XXX".
BORROWER: All agreed. Thank you.
Deposits can be made in the form of unallocated or allocated (physical) gold; however,
there is an additional procedure for weighing the physical gold because the depositor
may receive other LGD gold that differs in weight. Unless otherwise agreed upon during
the transaction, interest is paid in US dollars. Investing gold into deposit introduces credit
risk against the gold deposit holder which must be taken into account. Gold deposit rates
(proxied by taking the difference between the USD Libor rate and the USD gold swap rate)
float around zero during periods when the market is calm as the borrowing bank typically
swaps the gold deposits into US dollars and loans out the US dollars to earn the spread
between the rate on USD deposits/loan and the USD gold swap rate (Figure 25).
FIGURE 25: HISTORICAL 6-MONTH GOLD DEPOSIT RATE
Source: Author calculations based on Bloomberg data.

Gold swaps can also be used to raise liquidity when it is needed. Because the lending
is collateralized by gold, interest rates can be cheaper. Gold swaps are traded with a
predetermined amount of gold converted into currency with the commitment to reverse the
transaction. The gold borrower typically pays a fixed fee expressed in percent per year.
Demand for gold swaps is especially strong during times of financial stress in markets, when
institutions try to leverage their relatively illiquid gold holdings to obtain liquid cash to cover
their positions, pushing swap rates higher (Figure 26). Gold swaps, like derivative products,
are governed by conventional derivatives master agreements and require participants to
sign the International Swaps and Derivatives Association (ISDA) agreement.
FIGURE 26: HISTORICAL 1-MONTH USD-GOLD SWAP RATE
Source: Author's calculations based on Bloomberg data.

G OLD H EDGIN G
The gold positions can be hedged with the use of derivative instruments such as forwards,
futures, and options (Table 22).
Forwards and futures, agreements to buy or sell gold at a predetermined price on

a specified date in the future, are the least expensive way to hedge future gold
price fluctuations. Practically free hedging strategies, these instruments do not allow
flexibility, and counterparties are obliged to make good on sell/buy agreements on the
predetermined price and date.
Gold can be hedged using forward contracts in the OTC market through the bullion banks.
Being a fully tailor-made product, forwards allow customization of the hedge parameters
to meet investors’ preference. One drawback of using the forward contract to hedge gold
exposure is that it requires counterparties in the OTC transaction to sign a ISDA agreement.
Example of the Loco London unallocated gold—USD swap deal with the bullion bank.
Hereby the gold has been sold to the borrower at

GOLD LENDER:Hi friends. Would like to swap 2015 USD/oz on Feb 5, 2022, with the obligation
10,000 oz Loco London gold to USD for 1 to buy it back at the forward rate of 2018.02 =
month. Please quoate your best. (((2015*1.8%*30)/360) + 2015) on Mar 5, 2022.
BORROWER: Sure. 180bp at basis price 2015 The lender of the gold thus receives
USD/oz please. US$20,150,000 to use for one month. In one
GOLD LENDER: Done month, the lender must reverse the transaction
by buying the gold back for US$20,180,200
GOLD LENDER: to confirm I swap XAU USD
(implied USD lending cost is US$30,200).
10,000 oz at 180bp (bp - 2015 USD/oz).
Tenor - Feb 5, 2022 - March 5, 2022. The confirmation of the swap trades are sent
At maturity my XAU to our account with using form MT399 or MT699 (free format) SWIFT
"XXX". messages at T+0.
BORROWER: All agreed. Thank you. The settlement of the trade is the same as for
the unallocated gold settlement procedure.
Gold futures are traded on the COMEX division of the New York Mercantile Exchange
(NYMEX), with a standard contract size of 100 troy ounces and two smaller contracts of 50
and 10 troy ounces. The exchange specifies the delivery of gold to exchange-approved
vaults, although these terms are subject to change by the exchange. It is imperative to have
an approved futures trading account to partake in gold futures trading.

TABLE 22: COMPARISON OF GOLD DERIVATIVE CONTRACTS
Forward Futures Options

Customized (OTC),
Nature Customized Standardized Standardized
(Exchange)
Venue OTC Exchanges OTC of Exchange
Flexible through
100, 50, or 10 oz per OTC, 100 oz
Size Flexible
contract per contract via
Exchange
Cost Free Free Market premium
Liquidity Less liquid High liquid Less liquid
Risky (OTC),
Counterparty risk Risky Negligible negligible
(Exchange)
Settlement Physical Cash or physical Cash or physical
None (OTC),
Margin None Required
required (Exchange)
No MTM (OTC),
Mark-to-market (MTM) No MTM MTM on daily basis MTM on daily basis
(Exchange)
Source: LBMA, COMEX.
Options hedging comes at a substantial cost depending on the implied volatility of the gold
price; however, it provides the right, but not the obligation, to sell/buy gold at the agreed
price to the long side of the deal. Divergences exist between the two primary gold options,
which are based on the most liquid gold futures contracts globally at the Shanghai Futures
Exchange (SHFE) and the COMEX. Although sharing some similarities, the SHFE’s gold
option is classified as European style, while the gold options offered at the COMEX are
classified as American style (Table 23).
Investors cannot trade Exchange-traded futures or options contracts directly with the
exchange; trades are conducted through the accredited broker providing the investors’ with
market access.

TABLE 23: COMPARISON OF MAIN GOLD OPTION
Specifications COMEX SHFE

Contract Unit 100 troy ounces 1000 g
Minimum Price
US$0.1 per troy ounce 0.02 yuan/g
Fluctuation
Price Quotation US$/troy ounce yuan/g
Sunday-Friday 6:00pm - 5:00pm
China Standard Time: 9:00am
[5:00pm - 4:00pm CT) with
Trading Hours - 11:30am, 1:30pm - 3:00pm on
a 60-minute break each day
trading days
beginning at 5:00pm (4:00pm CT)
Monthly contracts listed for 20
Next three consecutive months
consecutive months and any June
Listed Contracts and even months in the nearest
in December in the nearest 72
thirteen months
months.
Trading terminates at 3:00pm on
Trading terminates at 12:30pm CT
Termination of the 5th last business day of the
on the 4th last business day of the
Trading month prior to the underlying
month prior to the contract month
future's spot month
The month prior to spot month:
Position Limits Spot month: 3000 lots
long/short: 2700 lots
Other months: long/short: 9000
Other months: 6000 lots
lots
the limit-up and limit-down of
Price Limit option, no, futures, yes
underlying futures in yuan
Minimum 40 strikes at $5.00
per troy ounce strike increment, Strike prices range between
then 10 strikes at $10.00, then 8 1.5 times underlying future's
Strike Price strikes at $25.00 depending on last settlement and 0.5 times
Listing stike price levels. Dynamic strikes underlying future's last settlement
Procedures at $5.00 per troy ounce strike in steps of 2 yuan/g, 4 yuan/g and
increment above and below the 8 yuan/g depending on the strike
highest and lowest pre-listed prices
strikes.
Exercise Style American European
Settlement
Deliverable Deliverable
Method
Underlying Gold Futures Gold Futures
Source: Jia 2020.
Hedging gold exposure is especially attractive during financial crises, as by entering the
gold forward, the institution allows the counterparty to use the liquidity for additional time
based on the tenor of the contract. Gold forward rates closely follow the gold-USD swap
rate, as essentially the institution entering the forward agreement is similar to the party on
the short side of a swap contract (Figure 26).
For example, a central bank selling gold at the spot price of 2015 USD/oz could have
entered a one-month forward contract with a forward premium of approximately 5 percent.
This means that the central bank must deliver the gold to the buyer in one month, and the
buyer must purchase the gold at the forward price of 2023.4 USD/oz for a premium of 8.4
USD/oz. Although the seller of gold is fixing its downside at a forward price, entering this
forward contract foregoes the upside potential.
The central bank can retain the upside potential and hedge the dowside risk of the
gold price by buying the one-month put option with the strike price of 2023.4 USD/oz.
Put options can be purchased in the OTC market from bullion banks (under customized
contracts) or exchanges such as COMEX (using standardized contracts) via brokers. Each
option contract is worth 100 ounces of gold. If an option costs US$15, the amount paid for
the option is US$15 x 100 = US$1500. Purchasing a gold futures contract that allows the
purchaser to buy 100 ounces of gold requires a maintanance margin of US$8,300, while
purchasing physical gold necessitates a full cash outlay for each ounce purchased.
For example, on March 31, 2023, the LBMA PM Fixing for gold was 1979.70 USD/oz. If the
central bank wants to hedge its downside, it can buy a put option at the closing price of
22.40 USD/oz per troy ounce of gold. This means that the total cost of the put option to
hedge the position on 10,000 oz will be US$224,000 (10,000*$22.40).
Several option strategies, such as zero cost collars, barrier options, binary options, and
others, involve combining a long/short position in puts/calls and lowering the cost of
hedging by changing the risk profile.

IV. OPERATIONAL ASPECT OF
GOLD TRADING
B U YING GOLD TH ROUGH LOCAL PROD UCT ION
Purchases of local gold production have a distinct advantage in that, because the gold is
purchased for the local currency, the procedure can help build up foreign reserves.
Central banks can set up local gold buying programs in several ways. The most common
procedure is to give the country’s central bank a “priority right” or “right of first refusal”
to purchase local production. (Some countries like Ethiopia, Ghana, Kazakhstan, the
Kyrgyz Republic, Türkiye, and Uzbekistan use this approach.) An alternative method is for
the central bank to set up a special gold buying program or form direct agreements to
purchase the metal from local artisanal and small-scale miners (e.g., the ASGM program) or
commercial banks (as in Bolivia, Ecuador, Mongolia, the Philippines, the Russian Federation,
and Zambia).
The central banks publish the official gold purchase prices and usually include a discount
for logistics costs, trading (bid-ask spread), and quality, if the metal is not of LGD standard.
Since most locally produced gold comes in nonstandardized form, the central banks
engage in quality swap programs to upgrade their holdings to LGD standard. This is
accomplished with the help of LGD refiners, with both the Bank for International Settlements
(BIS) and bullion banks providing intermediary services.
The Central Bank of Philippines is uniquely positioned, as it has run its own LGD refiner
since 1974, allowing the bank to upgrade the gold it purchases from local small-scale
miners to international standards. A decision to set up the LBMA-accredited refiner must be
considered carefully, as the association imposes strict requirements related to gold quality
and production levels on potential candidates.
Notably, the absence of LBMA compliance does not mean that the gold owned by a central
bank will be untradable in international markets, since some bullion banks can purchase
gold of certain minimum fineness, albeit on discount. The LBMA accreditation merely
ensures the liquidity of the gold holdings by deeming them acceptable for settlement in
world’s biggest trading venues, such as the London Bullion Market, COMEX, and SGE.

Box 1: Central Bank of Ecuador’s ASGM Program
The Central Bank of Ecuador (BCE) began its gold purchase program in 2012, and it has
emerged as an increasingly promising strategy helping to formalize the ASGM industry
while also growing the developing country's international reserves.
The program aims to formalize and support small-scale mining operations while bolstering
the country's international reserves. By establishing collection centers in strategic locations,
the central bank facilitates direct gold sales from artisanal miners.
By cutting out intermediaries, the program ensures that miners receive fair prices for their
gold. This has had a positive impact on their livelihoods. Individuals or entities interested in
trading gold must meet specific requirements, including having a registered mining license,
remaining up-to-date with their tax obligations, and avoiding involvement in crimes such as
money laundering or narcotics trafficking. They must also register and obtain authorization
as an Economic Agent with the BCE. The gold purchase procedure involves determining
the fine gold content through the density method, receiving molten bars meeting certain
criteria, and making payment through direct transfer to the seller's registered bank account.
The BCE has an antibribery policy in place, prohibiting actions such as offering gifts to
gain undue advantage or accepting gifts that could create conflicts of interest (World Gold
Council 2021).
The central bank's commitment to environmental and social responsibility is evident in the
program's design. It adheres to stringent standards, ensuring that gold purchases comply
with sustainability practices. Additionally, the bank provides technical assistance and training
programs to improve mining practices, enhancing the sector's long-term sustainability.
Although the initiative only benefits individual miners, it also has macroeconomic
implications. The acquisition program has contributed to Ecuador's international reserves,
increasing their value by approximately $1.4 billion. The gold purchase program has helped
the BCE obtain around eight tonnes of nonmonetary gold over the past decade. This
enabled the central bank to add around 2.5 tonnes of internationally certified gold bars
to its international reserves last year, boosting its coffers by $158 million. The addition
of monetary gold helped Ecuador’s international reserves to grow to $9.35 billion as of
January 20, 2023 (Jeffery et al. 2023).
Furthermore, the program has successfully formalized the artisanal mining sector.
Previously operating in the informal economy, these miners are now part of a regulated
and transparent market, bringing them under the purview of government regulations and
improving overall industry transparency.
51
C U STODY OP TIONS
Gold holdings can be custodied in allocated form at home or in many official institutions
offering the service—such as the Bank of England (BOE), the BIS, Banque de France (BdF),
and the Federal Reserve Bank of New York (FRBNY)—or in unallocated form with the bullion
banks and logistics companies offering vaulting service (Tables 24 and 25). Some bullion
banks in the London Bullion Market offer unallocated accounts (HSBC Bank Plc, ICBC
Standard Bank Plc, UBS, and JP Morgan Chase); these banks are clearing members of
London Precious Metals Clearing Limited (LPMCL).
The important consideration in choosing the type of gold custody is the fee. The bullion
banks usually have no charges for unallocated accounts, while the allocated storage fees
can be at least 1.5 percent per annum. However, there are handling fees to move the
physical gold into both types of custody accounts, usually charged on a per bar basis.
Notably, gold custody in an unallocated account with a bullion bank exposes the owner to
the account provider’s credit risk, whereas allocated accounts are not exposed to credit
risk because they are typically held with central banks of developed countries. Political risks
must be considered in either case, because gold accounts can be frozen.
TABLE 24: COMPARISON OF MAJOR GOLD CUSTODIES
Custodian Bank of England Bank of France New York FED BIS

Governments, Governments,
official institutions, official institutions, Governments and Governments and
Clients
commerical banks, and commerical official institutions official institutions
and firms banks
Unallocated Loco
Allocated LGD Allocated LGD London, Berne,
Gold type Allocated accounts
bars bars and New York
accounts
Location London Paris New York Berne
Gold purchases
Gold trading, gold
and sales, outright
Extra services quality upgrade,
forwards, deposits,
location exchange
gold swaps
Source: BOE, Banque de France, NY FED, and BIS.

TABLE 25: VAULTING LOCATION OF CENTRAL BANK GOLD RESERVES
Vaulting Location (% of Total Holdings)
Tonnes Domestic BoE NY Fed SNB BoC BdF BIS
United States 8,133.5 100%
Germany 3,359.1 50.9% 12.4% 36.8%
Italy 2,451.8 44.9% 5.8% 43.3% 6.1%
France 2,436.3 Undisclosed
Russian Federation 2,292.3 100.0%
China 1,948.3 Undisclosed
Switzerland 1,040.0 70.0% 20.0% 10.0%
Japan 846.0 Undisclosed
India 703.7 42.0%
Netherlands 612.5 31.0% 18.0% 31.0% 20.0%
ECB 504.8 Stored across several locations; breakdown undisclosed.
Taiwan 423.6 Undisclosed
Kazakhstan 385.9 Undisclosed
Portugal 382.6 45.1% 48.7% 1.0% 5.2%
Uzbekistan 358.0 Undisclosed
Saudi Arabia 323.1 Undisclosed
United Kingdom 310.3 100.0%
Lebanon 286.8 Undisclosed
Spain 281.6 Undisclosed
Source: World Gold Council, 2022.
LO GISTICS CON S IDERAT IONS

Logistics and insurance for gold are usually accomplished by only a few of the largest
logistics companies possessing the required capabilities to secure the transport of high-
value cargo. Among them are Brinks, Loomis, Malca-Amit, and G4S, who offer full suites of
solutions for secure transport, insurance, and vaulting of physical gold.
Physical gold is transported and insured in accordance with the international terms of sale
(Incoterms) agreed upon with the logistics company. Free on board (FOB) or delivery at place
(DAP) are common terms of sale. The former implies that, once the gold is loaded onto the
transport vehicle at the point of departure, the seller’s right to the gold is transferred to the
buyer and insured by the logistics company during the journey to the buyer’s vault.

With DAP, the seller organizes the transportation of gold directly to the buyer’s port, where
the right to the metal is transferred. The cost of transportation and logistics is usually
charged in dollars per ounce and varies by around 5 to 15 cents per fine ounce, depending
on the amount of gold shipped, terms of the sale, type of insurance, the use of a special
courier to accompany the cargo, and other conditions. Location swap fees can also be
charged when gold is delivered to a port other than London (usually Zurich).
An alternative way to organize the transport of the gold is through bullion banks, which act
as buyers of the physical gold and organize the logistics and insurance. The benefit of this
approach for the gold seller is that bullion banks sometimes offer premiums on top of the
spot price to buy physical LGD-quality gold. The size of the premium is determined by the
demand for physical gold in major gold-buying countries, such as India and China.
For example, the spot price of gold on February 20, 2023, was around $1,841/oz, $2,069/
oz on the MCI India, and $1,862/oz on the Shanghai Gold Exchange (SGE). This allows the
bullion bank that purchased the LGD gold to earn a premium by refining it into kilobars
accepted in the India and China exchanges and selling it in those markets.
Example of the physical gold shipment deal with the bullion bank on FOB basis.
According to the terms

SELLER:Hi friends. Please quote your best to ship 10 metric of the deal, the buyer (a
tonnes of XAU Loco London on FOB “Port name” basis bullion bank) will organize
on March 20, 2023, against our unallocated account with transportation for the gold
“Custodian name” with insurance. We will require 1 courier to from the seller’s port (usually
accompany this shipment. an airport) to its own vault
and credit the unallocated
BUYER: Hello friends. Sure, we can take it at 10 cents/oz (cost).
account of the seller with
SELLER: Agreed. Here are the details of the shipment: an amount equal to the fine
Gross weight: 9,998,462.80 gram, 321,402.251 oz. weight of gold bought from
the seller. Notably, if the seller
Fine weight: 9,997,256.10 gram, 321,286.988 oz. offered a premium for this
810 Bars, 16 pallets. deal (for example +10c/oz), the
buyer would have received
For good order’s sake we will pay you $32,128.70 (10 cents *
the equivalent dollar amount
321,286.988) on March 20, 2023. Agreed?
($32,128.70).
BUYER: All agreed. Thank you very much for the deal. Ciao!

G OLD ACC OU NTING FRAME WORK
Established accounting practices for gold are scarce due to its limited adoption as an asset
by various entities. One reason for this limited adoption is that most central banks are
required to follow International Financial Reporting Standards (IFRS), which do not provide
adequate guidance on how gold should be treated (Schwarz et al. 2015). As a result, central
banks have implemented various measures for managing their gold reserves, typically
involving differentiation between monetary gold and nonmonetary gold. The former is
considered as part of foreign reserves and may be valued by some central banks at market
prices, while others use its cost as the basis for valuation. Nonmonetary gold, on the other
hand, is typically valued either at its cost or at the lower of cost and net realizable value
(Bholat and Darbyshire 2016).
Therefore most central banks refer to IMF’s BOP and IIP manual (BPM6) for guidance
(Sullivan 2022). According to IFRS, gold bullion is treated as a commodity rather than a
financial asset, and all foreign exchange revaluation gains and losses on monetary items
must be reported through profit and loss. As a result, the IFRS 9 and IAS 32 rules do not
apply to gold because financial loss arises from a contractual arrangement, which gold
does not have. Gold does not qualify as an investment property under IAS 40 because
investment property is either land or a building or its components. According to the World
Gold Council, this treatment is appropriate for jewelers and manufacturers, but central banks
use their gold to raise foreign exchange liquidity (for example, during times of national crisis)
and require a fair value assessment of the resources at their disposal (World Gold Council
2021b). Central banks within the Eurosystem receive guidance on the treatment of gold from
the European System of Central Banks (ESCB).
Accounting practices vary considerably among public institutions. The most common
approach to reporting returns on gold has been to account for unrealized gains and
losses as reserves, either in equity or a nonequity account (43 percent). For 36 percent
of institutions, the mark-to-market valuation of gold affected the profit and loss account.
Notably, few institutions (18 percent) include unrealized gains and losses on gold when
calculating distributions to their governments (Figure 27).
In the absence of clear guidance, seven accounting treatments for gold have emerged
(World Gold Council 2016). This fragmentation has led central banks to devise creative ways
to use their vast gold reserves to manipulate earnings (Box 2).

FIGURE 27: ACCOUNTING PRACTICES FOR UNREALIZED GAINS AND LOSSES ON GOLD
Source: Third RAMP survey on the Reserve Management Practices of Central Banks.
In 2018, at the request of several central banks, the WGC issued guidance on accounting for
gold for monetary authorities; this guidance, which also covers other forms of gold, aims to
achieve consistency across various institutions in accounting for all forms of gold holdings.
The framework, already adopted by some WGC member central banks, treats gold as a
financial instrument denominated in local currency.
Prepared with reference to the IASB’s accounting frameworks, the guidance provides a
framework for accounting for gold consistent with current financial reporting standards and
IMF’s BoP reporting. The WGC considers both presentation in the balance sheet and the
income statement, as well as the treatment of unrealized revaluations.
The guidance divides gold into three categories: monetary gold, nonmonetary gold, and
antique gold. Monetary gold is initially measured at fair value, with subsequent measurements
based on the cost of delivering gold to market. Nonmonetary gold is measured as a
commodity under IFRS rules. Antique gold can be measured using the monetary authority’s art
accounting policy.
The gold is revalued in a way similar that applied to currency. The unrealized gains are
disclosed through Other Comprehensive Income (OCI) or equivalent and allocated to special
gold unrealized revaluation reserve in equity. The unrealized losses are losses reported in
OCI and deplete the revaluation reserve until it reaches zero. Losses in excess of this amount
are reported through Profit and Loss (P&L). Realized gains and losses are reported directly
through P&L and help to reverse realized gains and losses from the revaluation reserve.
Other monetary gold transactions involving derivatives and other gold instruments, such as
swaps, location swaps, deposits, and others, are treated in accordance with the IFRS.
The guidance is simply a best practice recommendation with no legal mandate attached. It
only applies to monetary gold and cannot be used by monetary authorities who employ fully
historic cost accounting.
Box 2: Revaluation Account to Cover Losses: Curaçao and Saint Martin
The central bank of Curaçao and Saint Martin (CBCS) used its gold revaluation account
(GRA) to offset losses in 2021. The CBCS sold and immediately bought back some of its
gold reserves. A GRA is an account that records unrealized gains (or losses) of gold assets
and usually part of the equity. The CBCS started making losses in 2020 and 2021. They
held 420,395 fine troy ounces of gold and equity of Netherlands Antillean guilder (NAf) 1,341
million, of which NAf 1,275 million was GRA. This made it tempting to use some of the GRA
to cover losses.
In CBCS’s 2021 transaction, the bank sold and immediately bought back 2,945 ounces of
gold to turn an unrealized gain into a realized gain. The value of the gold traded was NAf
9.55 million, and CBCS’s total gold holdings did not change. CBCS dampened losses by
using a small portion of its GRA, thus keeping a healthy capital position.
One reason GRAs are prohibited from being used to absorb losses is because, once fully
run down, a declining gold price will cause GRAs to become negative, damaging the central
bank’s equity. For central banks that bought their gold during Bretton Woods at $35 dollars
an ounce, this risk is immaterial. Central banks may also choose to support the gold price to
avoid seeing it fall.
57
V. SUSTAINABLE INVESTING IN
GOLD
As the energy transition starts to pick up pace, decarbonization is quickly becoming a key
focus for many institutional investors. Reserve managers, in particular, are participating in
this trend, although the rate of adoption of ESG investing is still low (fourth RAMP Survey
2023): twenty-four percent of respondents consider ESG to be part of their reserve
management mandate. The low rate of ESG adoption in reserve portfolios is due to central
banks’ focus on high-quality, fixed-income assets, where the availability of ESG instruments
and strategies is limited (see Bouyé, Klingebiel, and Ruiz Gil 2021). Notably, environmental
factors dominate governance and social factors as more reserve managers implement or
consider implementing ESG into their investment policy (Figure 28).
FIGURE 28: INCLUSION OF ESG FACTORS IN THE INVESTMENT POLICY
Source: Fourth RAMP survey on the Reserve Management Practices of Central Banks (preliminary results).
Note: N=119.
It is important to note that physical gold extraction, by definition, cannot have a positive
environmental impact. Furthermore, there is no internationally accepted method for
assessing the carbon footprint of gold.
Gold mining is known to have a significant impact on anthropogenic climate change due to
the use of fossil fuels, primarily diesel, resulting in considerable greenhouse gas emissions
(Mudd 2007). Various studies have confirmed that the greenhouse gas emission (GHG)
intensity associated with gold production is substantially higher compared to that of other
metals (Baur and Oll 2019). However, when considering global production on an aggregate
level, gold proves to be more environmentally friendly than other metals.

This is due to its greater value and lower annual mining output in comparison to metals
such as silver, copper, iron ore, and aluminum (Hagelüken and Meskers 2010). Additionally,
compared to other nonrenewable resources, gold possesses the quality of durability to a
unique degree.
The gold industry’s annual carbon footprint is roughly 0.3 percent of global emissions (World
Gold Council 2022). Some empirical estimates put the median level of GHG associated with
the extraction of one metric tonne of gold at 20.3 tons (Ghia, Lindeman, and Zhang 2021),
16.9 tons (Hagelüken and Meskers 2010), 17.6 tons (Norgate and Haque 2012), and 15.4 tons
(Baur and Oll 2019). The estimates show that gold holdings lead to 36 percent less CO2
emissions than S&P500 holdings (Baur and Oll 2019).
According to Baur and Oll (2019), adding gold to a diversified equity portfolio not only
improves the risk-return relationship but also contributes to the portfolio’s sustainability by
reducing carbon emissions over time. This applies to both the S&P500 and carbon-efficient
versions of it. Even if carbon emissions are attributed to physical gold holdings, the impact
on carbon performance is positive, since emissions from companies are continuous, while
gold mining is a one-time event with nonrecurring emissions.
To regulate production processes at the level of mining and refining, the gold industry
adheres to a number of stringent standards and frameworks with the goal reducing the
environmental impacts and risks associated with gold production.
On the mining side, the World Gold Council (WGC) launched Responsible Gold Mining
Principles (RGMP) in 2019, which includes all WGC members, who currently account for
nearly 60 percent of annual large-scale gold production. RGMP consists of 51 principles
that examine all material ESG factors related to gold mining. It covers topics such as water
management, climate change, gender diversity, anti-bribery, and community engagement,
among others, to provide a comprehensive picture of the material risks and opportunities
shaping modern gold mining and its broader impacts.
On the refinery side, the LBMA’s Responsible Gold Guidance (RGG) was developed in close
compliance with OECD Due Diligence Guidance and introduced in 2012 (and updated in
2019 and 2021). The guidance includes global measures to combat money laundering,
terrorist financing, and human rights violations.
Furthermore, the RGG was designed to recognize the growing importance of strong
environmental, social, and governance (ESG) responsibilities. Because most GHG emissions
in gold production come primarily from generating and consuming electricity, once these
energy sources are switched from fossil fuels to renewable energy sources, emission
levels decrease. According to a Wood Mackenzie study of 31 major gold mining companies
published by the World Gold Council, the emissions intensity of power used in gold
production is estimated to fall by 35 percent by 2030. Given the rate of the energy transition
and the nature of industry decarbonization opportunities, gold mining could reach net-zero
emissions by 2050, in line with Paris Agreement targets (World Gold Council and Urgentem
2021).

Some of the initiatives put forward to improve the gold ESG score within investment
portfolios suggest investing in gold exploration companies as an alternative to investing
in mined gold. These companies only explore for and secure in-ground gold resources
without mining or causing significant environmental damage. Despite the uncertainty
regarding the amount and quality of the in-ground gold, this form of “green gold” correlates
strongly with traditional gold bullion (Baur, Trench, and Ulrich 2021).
No further emissions are associated with gold once it is in the hands of investors in the
form of refined bars. The debate over refined gold is that old (pre-2012) gold bars of
unknown origin that may have a criminal or violent history may be remelted into new ones.
Those remelted bars may end up in the vaults of gold-backed investment product issuers
who claim to be ESG compliant, a practice known as “greenwashing.” According to Bates
(2021), unlike other recycling practices, gold recycling does not contribute to reducing
waste and does not support responsible mining that enhances livelihoods. Human rights
groups caution that unverified recycled gold can be susceptible to mislabeling and money
laundering.
Various programs are in place to certify the origin and/or ESG characteristics of gold,
resulting in a premium between 1.7 percent and 10 percent over the market price of gold.
Expert interviews reveal unanimous agreement among industry professionals regarding the
significant value of provenance data for gold. There is a demand for such data, with market
participants indicating their willingness to pay a provenance premium estimated to be
between 0 percent and 2 percent (Gruber and Montemurro 2021).
Gold is not a natural draw for ESG investors due to the high environmental cost of extracting
gold from the ground, but the metal is a valuable financial asset, and producers are large
employers in developing countries, supporting long-term socioeconomic development
through job creation, tax revenue, and investment in local communities. In 2020, the WGC
estimated that its members contributed nearly US$38 billion to the GDP of the countries in
which they operate.
ETFs and similar products that issue shares backed by bullion are one of the most popular
ways to invest in ESG compliant gold. According to the most recent Reuters survey, the
majority of the largest gold ETFs prefer bars made after 2012, when LBMA RGG rules went
into effect, and some even prefer bars produced after 2019, when rules became even
stricter (Table 26). Some smaller funds, such as the Swiss banking group Raiffeisen and the
Swiss wealth management firm de Pury Pictet Turrettini, hold traceable metal from large and
artisanal mines. The industry is shifting toward holding more gold, which is known to appeal
to ESG-driven investors.

TABLE 26: TOP 10 ETF FUNDS BY GOLD HOLDINGS
Focus on Post- Focus on Post-

Fund Brands Country of Listing
2012 Bars 2019 Bars
SPDR Gold Shares US - -
iShares Gold Trust US - -

Invesco Physical Gold ETC UK Yes -
Xetra-Gold Germany - -
iShares Physical Gold ETC UK Yes -
ZKB Gold ETF ‡ Switzerland Yes -
Sprott Physical Gold Trust US Yes -
SPDR Gold MiniShares Trust US - -
WisdomTree Physical Gold UK Yes Yes
Amundi Physical Gold ETC France - Yes
Source: Hobson 2022 (Reuters), World Gold Council, 2023, ETF prospectus data.
G OLD: DECA RBON IZIN G INVE ST M E NT PORT FOLIOS

Quantifying the climate transition impact in a portfolio of investing in gold is critical for
investors attempting to assess and respond to the risks and opportunities posed by
climate change. According to the most recent research by WGC and specialist climate risk
consultancy Urgentem, increased gold allocations have a significant impact on an overall
portfolio’s carbon footprint and emissions intensity. A 10 percent gold allocation (along
with corresponding reductions in other asset holdings) reduced the emissions intensity of
a portfolio of 70 percent equities and 30 percent bonds by 7 percent; a 20 percent gold
allocation reduced it by 17 percent (World Gold Council and Urgentem 2021) (Figure 29).
The increased allocations to gold have led to notable corresponding reductions on the
carbon footprint and emissions intensity of the market value of the overall portfolio. A long-
term perspective is also required to determine how portfolio holdings of gold will contribute
to long-term climate scenarios and targets.

FIGURE 29: GOLD ALLOCATION AND CARBON INTENSITY OF PORTFOLIO
Source: Urgentem and WGC, 2021.
Additionally, carbon emissions associated with holding physical gold are minimal, and even
the concept of “embedded” emissions becomes less challenging given gold’s promising
pathway to decarbonization. This means that holding gold over the long term will likely
lower the carbon footprint of an investment portfolio over time.
Decarbonization pathways are calculated using a bottom-up approach to determine the

emissions trajectories of different portfolios. Portfolio emissions trajectories are then
compared to global scenario pathways. This information can help investors understand how
their portfolios are likely to perform under different climate scenarios.
Analysis of different portfolio compositions (bonds and equities) and of how increased
allocations to gold can positively impact efforts to more closely align a portfolio’s carbon
trajectory with the global goal of net zero shows that no portfolio comprised of these assets,
given what is known about their current or projected future carbon profiles, wholly aligns
to a Net Zero 2050 carbon target. Nonetheless, allocations to gold might have a positive
impact on future alignment (Figure 30).
A “temperature rating,” which seeks to quantify the temperature implications of investment

holdings, is one forward-looking measure that can help asset managers understand the
transition pathways of their investments toward net-zero GHG emissions by 2050. Although
it is worth noting the ongoing debate about whether such metrics obscure important factors
within a portfolio, foster complacency, or divert attention from real-world climate risks and
impacts (Thinking Ahead Institute 2020), portfolio temperature metrics, when combined with
a variety of other measures and detailed consideration of future decarbonization pathways,
can provide a useful and concise indicator of potential exposure and progress.

FIGURE 30: GOLD ALLOCATIONAND PORTFOLIO DECARBONIZATION
Source: Urgentem, and WGC, 2021.
Urgentem findings suggest that gold may be useful in mitigating the climate impacts of
investment holdings. The estimated temperature increase implied by portfolio holdings falls
by more than 1°C when compared to portfolios without gold; a 20 percent gold weighting
results in a temperature fall of 0.44°C (Figure 31).
FIGURE 31: GOLD ALLOCATION AND IMPLIED PORTFOLIO TEMPERATURE
Decarbonization costs, expressed as a value per ton of carbon dioxide equivalent (tCO2e),
can help investors analyze the potential impact of climate-focused policies and associated

business cost implications on their portfolios. Carbon pricing policies will have a negative
impact on a portfolio value over time, especially in the Net Zero 2050 scenario. This is
because the higher carbon price will constrain returns from both the equities and fixed
income markets. However, gold can play a role in minimizing the negative impact of carbon
pricing policies. The World Gold Council analysis showed that expected portfolio loss is
minimized by increasing the weight of gold in a portfolio. Comparing a portfolio with no
gold to one with a 50 percent allocation to gold, the loss of portfolio value is reduced by 5
percent (Figure 32).
FIGURE 32:
Gold can be a climate-risk mitigating asset in an investment portfolio. Gold’s role as a safe
haven asset, risk hedge, and store of value during periods of market stress lends credence
to analysis suggesting that gold’s long-term returns may be more robust than those of
many mainstream asset classes in the context of a range of climate scenarios and possible
impacts.
It should be emphasized that the analysis presented here assumes that the gold mining
industry will take substantial actions to decarbonize. If that does not happen, and little
progress is made in reducing the use of fossil fuels in on-site operations or in lowering
emissions from high-emission mines, the potential of gold holdings to reduce an investment
portfolio’s carbon footprint would be significantly reduced.

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GOLD INVESTING HANDBOOK
FOR ASSET MANAGERS
Kamol Alimukhamedov

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ii | GOLD INVESTING HANDBOOK FOR ASSET MANAGERS

I. BACKGROUND ON THE GOLD MARKET 5

II. GOVERNANCE AND STRATEGIC ASSET CREDENTIALS OF GOLD 13

Gold performance across institutional portfolios 29

III. PORTFOLIO MANAGEMENT 39

IV. OPERATIONAL ASPECT OF GOLD TRADING 50

Buying gold through local production 50

Gold accounting framework 55

V. SUSTAINABLE INVESTING IN GOLD 58

2 | GOLD INVESTING HANDBOOK FOR ASSET MANAGERS

FIGURE 1. CENTRAL BANK NET GOLD PURCHASES AND SALES

Source: Bloomberg, World Gold Council.

GOLD INVESTING HANDBOOK FOR ASSET MANAGERS | 3

4 | GOLD INVESTING HANDBOOK FOR ASSET MANAGERS

FIGURE 2. STRUCTURE OF THE GOLD MARKET

and flows 52% Jewellery 26% Bar and coin 8% Technology

sem i-finished goods

2% ETFs and similar products 13% Central banks

bullion Financial services bullion Futures exchanges

Total mine supply 75% 3,482 tonnes financial

bullion Central banks

Sovereign wealth funds

GOLD INVESTING HANDBOOK FOR ASSET MANAGERS | 5

TABLE 1: GOLD SUPPLY/DEMAND CHANNELS

Total supply 4,754.5

Total demand 4,754.5

Source: Metals Focus, Refinitiv GFMS, World Gold Council.

6 | GOLD INVESTING HANDBOOK FOR ASSET MANAGERS

TABLE 2: WORLD OFFICIAL GOLD HOLDINGS

Holder Tonnes % of Reserves % of Total

Italy 2,452 64% 7%

ECB 507 27% 1%

Source: IMF International Financial Statistics, April 2023.

GOLD INVESTING HANDBOOK FOR ASSET MANAGERS | 7

FIGURE 3. COMPOSITION OF OFFICIAL CURRENCY RESERVES

Source: COFER and World Gold Council (Q4 2022).

FIGURE 4. HOW CENTRAL BANKS PURCHASE GOLD

Source: World Gold Council.

TABLE 3: GOLD TRADING VOLUMES (MARCH 2023)

Holder Tonnes In US$ Billions % of Total

Total OTC 102.63 56.2%

Exchanges Shanghai Gold Exchange 1.09 0.6%

ETF Asia 0.25 0.1%

Other 0.02 0.0%

Source: World Gold Council.

TABLE 4: LARGEST GOLD ETF FUNDS

Fund Brands Country of Listing Holdings as of Q1 2023

Xetra-Gold Germany 230

Source: World Gold Council.

10 | GOLD INVESTING HANDBOOK FOR ASSET MANAGERS

Research by Baur and Smales (2020) established a positive relationship between

GOLD INVESTING HANDBOOK FOR ASSET MANAGERS | 11

TABLE 5: TOP 10 ANNUAL INCREASES IN THE SHARE OF GOLD IN RESERVES, 2000–2021

Sanctions by the US (2018) and EU (2019); COVID-19

Belarus 2010 17% 57% Sanctions by Russia in 2010