It's Sensible For Central Banks To Hold Gold - Former BOE Head Mervyn King

By Kitco News

Tuesday June 07, 2016 12:24

(Kitco News) - With the growing threat of renewed global instability, the former governor of the Bank of England said that gold could play an important role in a central bank’s official reserves.

Image courtesy of the Trades Union Congress    

Lord Mervyn King, the head of the Bank of England from 2003 to 2013, made the comments in an interview with the Wold Gold Council -- in its latest edition of Gold Investor, released Tuesday.

In particular, because of current market conditions, King said that he could understand why China’s central bank doesn’t want to be completely reliant on U.S. government bonds. He added that it is unlikely the U.S. would ever default on its debt obligations; however, he added that nothing is certain.

“I can understand why they feel that some proportion of their portfolio needs to be in gold,” he said in the interview. “There are plenty of big concerns that make it extremely reasonable to have assets in your portfolio that are not dependent on the goodwill of other countries.”

King also said that it could be important for other emerging-market central banks to increase their gold reserves and protect against rising inflation and the threat of hyperinflation.

“I can understand why holding gold would seem to be a sensible part of a national portfolio. Because there is clearly a need to take some precautions against an unknowable future,” he said.

On monetary policy, King said that he believes that central-bank action has run its course. His opinions on ultra-loose monetary policy are interesting as that was one of the tools he used during the 2008 finical crisis. He added that as head of the BOE, he led the charge for low interest rates and quantitative easing because it was the only way to boost much-needed liquidity into the market.

However, eight years after the crisis, he said those policies are becoming less effective and have outlived their usefulness.

“So monetary policy is not only meeting diminishing returns, but it’s making the ultimate adjustment even bigger. It’s taking us in the wrong direction,” he said.

He added that with monetary policy running its course, it is now up to governments to promote growth by adopting positive fiscal policies.

“All monetary policy does is to essentially buy a bit more time in the hope that policymakers will do the right thing. But we’ve bought eight years now and they still haven’t done what’s right,” he said. “Governments really have to do something to boost people’s beliefs in their future income, so they need to put in place a sustainable program of improving productivity over the next 10 to 20 years.”