How does banks use or invest the gold exactly? And why?

Hi. Wants to know why Gold investment is better & the how does a gold plays a good investment role in banking. How does banks use it.

3 Replies to “How does banks use or invest the gold exactly? And why?”

  1. Gold played a central role in the international monetary system until the collapse of the Bretton Woods system of fixed exchange rates in 1973. Since then, the role of gold has been gradually reduced. However, it is still an important asset in the reserve holdings of a number of countries, and the IMF remains one of the largest official holders of gold in the world. Consistent with the new income model for the Fund agreed in April 2008, on September 18, 2009, the IMF Executive Board approved gold sales strictly limited to 403.3 metric tons, representing one eighth of the Fund’s total holdings of gold at that time. Resources linked to these gold sales will also help boost the Fund’s concessional lending capacity.

    How the IMF acquired its gold holdings
    The IMF held 93.8 million ounces (2,917.1 metric tons) of gold at designated depositories at end July 2010. The IMF’s total gold holdings are valued on its balance sheet at SDR 3.9 billion (about $5.9 billion) on the basis of historical cost. As of July 31, 2010, the IMF’s holdings amounted to $109.6 billion at current market prices.

    A portion of these holdings was acquired after the Second Amendment of the IMF’s Articles of Agreement in April 1978. This portion, which amounted to 12.97 million ounces(403.3 metric tons) prior to the sales agreed in September 2009, is not subject to restitution to IMF member countries (see below), unlike gold the IMF acquired before 1978. In September 2009 the Executive Board authorized the sale of this post-Second Amendment gold, and at end July 2010, a total of 103 metric tons of this portion of gold remained on the Fund’s books.

    The IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions.

    •First, when the IMF was founded in 1944 it was decided that 25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represents the largest source of the IMF’s gold.
    •Second, all payments of charges (interest on member countries’ use of IMF credit) were normally made in gold.
    •Third, a member wishing to acquire the currency of another member could do so by selling gold to the IMF. The major use of this provision was sales of gold to the IMF by South Africa in 1970–71.
    •And finally, member countries could use gold to repay the IMF for credit previously extended.

  2. Commercial banks generally generally do not hold gold or very little. Central banks on the other hand currently hold about 30,000 tons of gold. At one time gold was used for settling foreign debts but is no longer done.

    Jewelery and Coins account for about another 40,000 tons and industry uses about 1,200 tons annually. Over the last 30 years, central banks have been dumping gold on the market reducing their holdings by about 6,000 tons and have dumped 390 tons on the market during the first half of this year.

    Gold is very speculative and if central banks dump too much gold on the market, it will drive the price down. The current gold bull run has been aided by gold ETFs. Whenever a gold ETF is created, the fund manager must purchase gold to back the ETF. Since ETFs are traded and not redeemed, the gold never returns to the market place unless the ETF is closed down. In the case of the GLD ETF (the worlds largest gold ETF), 1,100 tons of gold has been purchased to secure the ETF.

    Generally central bankers are cautious about dumping gold on the market trying not to force the price down. However, temptations to sell gold can get very high when gold is very high and a country in financial problems needs to raise money.

  3. Mine production – Approximately 2,485 tonnes (or 2,485,000 kilograms) of gold are mined per year.
    Recycled gold – Gold is of such value that it is capable, if needed, of being extracted, melted down, refined, and reused.
    Central banks – They hold about one-fifth of the stocks of gold as reserve assets. Governments hold about 10% of their reserves as gold.
    Gold production – This consists of finding the ore, creating access to it, removing it through mining, and processing and refining it.

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