Why Do Central Banks Hold Gold? An Analysis of Trust

In this paper we analyze the effect of central bank gold holdings on government bonds and exchange rates. We test the hypothesis that gold reserves build trust and thus reduce government bond yields and exchange rate volatility. The econometric analysis of a panel data set comprising a heterogeneous sample of countries provides only mixed evidence for the "trust hypothesis". Consequently, we are also sceptical about proposals to use gold as collateral for newly issued government debt