Identifying the optimal level of gold as a reserve asset using Black-Litterman model: the case for Malaysia, Turkey, KSA and Pakistan
Purpose – After the collapse of the Bretton Woods fixed exchange rate system in 1971, countries moved towards floating exchange rates, and the expectation was that the requirement for foreign reserves would decrease. However, central banks currently hold more foreign exchange reserves to enhance t...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English English English |
| Published: |
Emerald Publishing
2018
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| Subjects: | |
| Online Access: | http://irep.iium.edu.my/60884/ http://irep.iium.edu.my/60884/ http://irep.iium.edu.my/60884/ http://irep.iium.edu.my/60884/13/60884_Identifying%20the%20optimal%20level%20of%20gold.pdf http://irep.iium.edu.my/60884/1/60884_Identifying%20the%20optimal%20level%20of%20gold_SCOPUS.pdf http://irep.iium.edu.my/60884/2/60884_Identifying%20the%20optimal%20level%20of%20gold_WOS.pdf |
| Summary: | Purpose – After the collapse of the Bretton Woods fixed exchange rate system in 1971, countries moved
towards floating exchange rates, and the expectation was that the requirement for foreign reserves would
decrease. However, central banks currently hold more foreign exchange reserves to enhance the credibility of
exchange rate policies. The demand for gold, which was the main reserve asset prior the collapse of the
Bretton Woods system, has increased as a reserve asset once again following the global financial crisis (GFC)
of 2008, given gold’s characteristics as a safe haven asset and a store of value. This study aims to analyse
official reserves of four countries, namely, Malaysia, Turkey, KSA and Pakistan. The Black–Litterman model
was used to build a new strategic portfolio with optimal allocation to gold. This study shows that all countries
under the analyses should increase their gold holdings to preserve the value of the portfolio during times of
financial turmoil.
Design/methodology/approach – The Black–Litterman model has been used to build a new strategic
portfolio with optimal allocation to gold. The study shows that all countries in our analyses suggested
increasing their gold holdings to preserve the value of the portfolio during times of financial turmoil.
Findings – The study found that countries under the analyses, namely, Turkey, Malaysia, KSA and Pakistan,
suggested increasing their official gold holding given the outstanding performance of gold during the GFC.
Research limitations/implications – Research can be further extended by including few more
countries from Organisation of Islamic Cooperation such as Qatar and Indonesia.
Originality/value – Emerging economies such as China, India and Russia started to sharply increase their
official gold holdings in the aftermath of the GFC. According to recent statistics, central banks of China and
Russia have been adding to their gold reserves. Of note, only in few European countries and in the USA, is the
share of gold in foreign reserves more than 50%. In the rest of the world, this figure is about 3-5%. The paper
elaborates the aforementioned subject and suggests the strategic weight of gold reserve for each country
under analysis. |
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