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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
136 votes (28.3%)
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To push domestic interest rates lower
119 votes (24.7%)
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To protect against other countries debasing theirs
182 votes (37.8%)
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To generate income from gold dividends
44 votes (9.1%)
Total votes: 481
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.