Greenback Reserves Eroding, Slightly

Written by Brad Zigler

You might have thought the wholesale liquidation in the U.S. stock market and the attendant rush to safe havens would have caused gold to soar. Well, gold did jump $25 an ounce through December gold futures, to close near the floor session high at $913.50. That move, however, paled in comparison to the $43 leap made a week before.

With all the uncertainty about the U.S. market, you'd think there'd be a complementary outflow from the dollar. You'd think, but you'd be wrong to do so. The greenback actually held its ground yesterday as measured by December dollar index futures. The contract scored a mid-range close, settling up 65 points at 77.70 Monday, rebounding from lows reached at the 76 level early last week.

The disparate interplay of dollars and gold is reflected in our real-time monetary inflation indicator that remained unchanged yesterday, at 12.4% (for an explanation of this metric, see "Computing Inflation In Real Time").

Real-Time Monetary Inflation

The reason for the stasis? Simply put, there just aren't that many places for panicky investors to hide their capital. The closest non-metal reserve is the euro, according to the International Monetary Fund. True, the latest IMF figures - for 2008's second quarter - show global central bank holdings of euros inching higher at the expense of the dollar, but the buck is still far and away the currency of choice for some $4.4 trillion in allocated global reserves. Second-quarter apportionments to the dollar fell 2% year-over-year, to 62%, while euro commitments rose 2%, to 27%. Five years ago, dollars accounted for 68% of global reserves; euros only 23%.

Percentage Of Central Bank Reserves

As the current crisis unfolds, it will be interesting to see just what happens to this ratio and to the proportion of reserves held in gold (we looked at the top 10 holders of bullion in "Need Gold? Check Your Fed Holdings"). Under the current Central Bank Gold Agreement - an accord regulating reserve sales among 15 central banks - a maximum of 500 tonnes of gold can be offloaded each year.