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Why might a central bank buy gold while deliberately targeting inflation in its own currency?
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To increase the value of its own currency
262 votes (26.0%)
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To push domestic interest rates lower
232 votes (23.0%)
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To protect against other countries debasing theirs
379 votes (37.6%)
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To generate income from gold dividends
136 votes (13.5%)
Total votes: 1,009
Answer: C – To protect against other countries debasing theirs.
Explanation: The irony is that a central bank can spend its working day managing a currency that deliberately loses around 2% of its purchasing power each year – then hold gold to protect the country’s reserves from other central banks doing much the same thing.
Foreign currencies and government bonds ultimately depend on another country’s monetary policy. Gold doesn’t. So when central banks buy gold, they’re effectively insuring themselves against the very monetary risks they help create.