May 13, 2013 | by Franck Cushner, CFP®
Traditionally, central banks from around the world, have allocated their countries’ reserves to government bonds from other countries. In a deviation from customary practices, central banks worldwide have been actively buying gold and equities in large amounts. With rates at record lows throughout the world bond markets, central banks are seeking higher yields and higher returns.
Managers of central bank assets are looking for alternatives to holding government bonds, after efforts to stimulate growth from the Federal Reserve, the Bank of Japan and the Bank of England helped send yields near to record lows.
Central banks bought the most gold in 2012 since 1964, with over 534 metric tons added to reserves, the most in nearly 50 years, according to data released by The World Gold Council. Ironically, with gold prices tumbling in April, central banks have incurred losses as gold has tumbled roughly 13% since the beginning of the year.
Central banks have enormous reserves of foreign exchange on hand which needs to be allocated. Inflation rates with many of these countries are at lows, thus the need to gravitate to foreign securities has become the only option.
In order to circumvent deflationary pressures in Japan, the Bank of Japan has implemented an inflation target of 2% for its economy. It is actively buying debt from other nations in addition to equity ETFs (exchange traded funds).
Some central banks have resorted to buying ETFs, passive baskets of stocks, in order to gain exposure to higher dividend yields and returns. The Federal Reserve is disallowed from buying stocks, and thus buys bonds.
The Bank of Japan is expected to double its holdings of exchange traded funds to 3 ½ trillion yen which equates to $35.2 billion.
Sources: Federal Reserve, Bank of Japan, World Gold Council, CentralBanking
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