What drives gold demand in central bank's foreign exchange reserve portfolio?

- Measures the share of gold in central bank's reserves for 1998-2014.
- Employs both static fixed effects and dynamic-GMM estimation techniques.
- Higher inflation, US dollar depreciation, significantly increases gold demand.
- Lower economic growth and stock market capitalization-to-GDP increase gold demand.
- Higher currency risks, monetary policy instability also increase gold demand.

This study examines the determinants of gold demand in central bank's foreign exchange reserves portfolio by using a panel data set of over 100 nations for 1998-2014. I find gold's US dollar and inflation-hedge properties as well as higher exchange rate risk and monetary policy instability to significantly increase central bank's gold holdings while higher economic growth and financial development to reduce such share. Moreover, the recent global financial crisis caused central banks to increase this share. The results imply the rationale for holding gold in central banks' reserves is actually not different than hedge fund managers or individual investors.