A national reservoir
George Chou, deputy governor of the central bank, describes gold as "the lifeblood of the nation." How do the gold reserves relate to our forex reserves?
A nation's forex reserves are comprised of the foreign currency holdings of its central bank. Broadly speaking, they include government holdings of gold, convertible foreign currencies, stocks, and bonds, and are used to provide stability during crises, to control exchange rates, and to meet the public's need for foreign currencies.
Forex and gold reserves are an important part of the foundation of a nation's currency, a sort of fiscal reservoir that can be drawn on in financial crises or wartime.
Taiwan's gold reserves used to account for roughly 3-4% of its forex reserves, and have even dropped as low as 2%. Today, they stand at 4.7% (most of the remainder is US dollars), a higher ratio than that of Japan, Korea, Singapore, or mainland China. What do those numbers mean?
Yang Tianli, deputy director of the Bank of Taiwan's precious metals department and a student of gold for more than 20 years, says that while gold holdings accounted for 61% of the world's forex reserves in 1980, they now amount to only 10%. The massive growth in forex reserves in the years since has caused gold's weighting to shrink.
According to the World Gold Council, as of April 2011, gold accounted for an average of about 11.1% of national forex reserves. While Taiwan's 423.6 tons of gold reserves rank 13th the world, they account for a below-average percentage of our forex reserves. Should Taiwan buy more? China, whose 1,054 tons of gold rank sixth in the world but account for only a very low 1.6% of its forex reserves, is buying more.
Yang points out that the emerging economies of the world have seen rapid growth in recent years, and have, especially in the years since 2000, accumu-lated enormous forex reserves. These have been comprised primarily of US dollar deposits and bonds, and secondarily of Euro deposits and bonds. The emerging economies' gold reserves, on the other hand, have accounted for a relatively small percentage, typically less than half the global average.
As a consequence, the world's emerging economies were naturally concerned when problems with sovereign debt and deficits emerged and worsened in the US and Europe, and took action to increase their gold reserves.
Kuan Chung-ming, a distinguished professor with the National Taiwan University Department of Finance, explains that the emerging economies have become unwilling to hold excessive amounts of US dollars. Instead, they have been adding to their gold reserves to preserve value because they see the US dollar as certain to weaken over the long term.
Addressing the issue of whether the US dollar holdings of Taiwan's central bank account for too much of its forex reserves, central bank governor Perng Fai-nan explains that foreign currencies are relatively easy to trade in, whereas gold trading requires complex logistics. He notes further that the central bank's gold holdings account for a larger percentage of our forex reserves than do those of our neighbors, and are already sufficient to reduce our forex risk.
In 1948, rampant inflation destroyed public confidence in the old Taiwan Dollar.