Huge losses from gold holdings among central
banks are a reminder that international reserves must be properly diversified, otherwise not serving its capital
preservation purpose which is supposed they are there for.
Today´s news
from the Swiss National Bank (SNB) said it expected to report a USD 9.9 billion
loss in 2013, a year when the precious metal price fell 28%. Financially,
losses are equivalent to less than 2% of total international reserves however; a
tangible consequence is the SNB will not be able to distribute dividends to the
Swiss Confederation and regional cantons.
It could
have been worse. A plan contained in a popular referendum that would require it
to keep at least 20% of its assets in gold has not been passed yet. In fact, Swiss
authorities are suggesting a no-vote on that. Gold holdings are at a lower, but
still risky, 8.3% of the central bank reserves.
Indeed, there may be good reasons to have gold as a reserve asset: the lack of credit risk, long term store of value and safe heaven behavior are key features for central banks. More so, after 2008. The question is of course, not ´if´ but ´how much´ to hold.
But in the
´how much´ issue, the consequences of overdoing it may be terrible. Venezuela may
turn the Swiss case as a minor anecdote in this respect. Its later government decided
the central bank to move away drastically from USD holding into gold, ending up
with 68.9% of less liquid, loss making international reserves. Therefore, even
if sound macroeconomic management were in place in Venezuela-(which of course,
is not)- the sole lack of diversification of its international reserves would
have cost Venezuela USD 4.9 billion last year, that is about 20% of its portfolio.
Bottom
line: Switzerland and Venezuela may have
sidereal differences but its central banks are not free from the adverse
effects of asset missallocation of its international reserves. Indeed, a new lesson in humility to investment
policy authorities worldwide.
Traditional
portfolio optimisation may be evolving to allow for more dynamics in parameter
estimation but the basic fact remains: a
fairly high degree of asset diversification is both fundamental and sound as a
guiding principle for risk management. Portfolio concentration is
undesirable and even a naive [1/N] rule
is a perfectly robust heuristic when, as it is usually the case, the assumed stability
of asset returns and correlations in Markowitz-type models does not make sense.
