While the Cen­tral Bank cur­rent­ly holds around US$163 mil­lion in gold re­serves as at the end of De­cem­ber 2024, with mount­ing eco­nom­ic and geopo­lit­i­cal un­cer­tain­ties, T&T’s banker to the Gov­ern­ment and reg­u­la­tor of fi­nan­cial in­sti­tu­tions ought to se­ri­ous­ly con­sid­er ex­pand­ing these hold­ings, giv­en gold’s ef­fec­tive­ness as a hedge against eco­nom­ic in­sta­bil­i­ty, econ­o­mist Dr Valmik­ki Ar­joon told the Sun­day Busi­ness Guardian.

He not­ed that the price of gold in­creased by 90 per cent from the end of 2019 to present, from US$1,582 to US $3009 per once.

Stat­ing that gold is wide­ly re­gard­ed as a safe-haven as­set, par­tic­u­lar­ly dur­ing times of eco­nom­ic un­cer­tain­ty, and un­like for­eign cur­ren­cies, stocks, and bonds – which of­ten lose val­ue dur­ing mar­ket dis­rup­tions, gold typ­i­cal­ly re­tains its val­ue and even ap­pre­ci­ates, Ar­joon is ad­vis­ing this is es­pe­cial­ly im­por­tant for cen­tral banks like T&T’s, which hold large re­serves of as­sets like bonds and for­eign cur­ren­cies, par­tic­u­lar­ly the US dol­lar.

Dur­ing pe­ri­ods of eco­nom­ic stress, when bond prices fall or cur­ren­cies de­pre­ci­ate, gold ris­es in val­ue as in­vestors and cen­tral banks flock to buy this safe-haven as­set, he added.

“This in­verse re­la­tion­ship means that gold can off­set loss­es in the val­ue of oth­er fi­nan­cial as­sets like bonds and forex, pro­vid­ing a cru­cial buffer that sta­bilis­es cen­tral banks’ over­all re­serve port­fo­lios.

“The re­serves we cur­rent­ly hold are not large enough and by not ex­pand­ing our hold­ings years ago, we missed op­por­tu­ni­ties to for­ti­fy our fi­nan­cial po­si­tion and mit­i­gate the desta­bil­is­ing ef­fects of shocks like volatile en­er­gy prices, the COVID pan­dem­ic, and geopo­lit­i­cal ten­sions – all of which have un­der­scored the im­por­tance of hold­ing gold as a strate­gic re­serve as­set as part of a di­ver­si­fied port­fo­lio.

“Greater hold­ings would have placed us in a far stronger po­si­tion to with­stand fi­nan­cial shocks and pre­serve eco­nom­ic sta­bil­i­ty,” Ar­joon ex­plained.

In the last year, he not­ed, cen­tral banks glob­al­ly sig­nif­i­cant­ly in­creas­ing their gold hold­ings, pur­chas­ing over US$96 bil­lion worth. The largest buy­ers were Turkey, Poland, In­dia, and Chi­na, caus­ing gold prices to soar by 52 per cent in that pe­ri­od.

The pri­ma­ry rea­son for these pur­chas­es, Ar­joon said, was to in­su­late their coun­tries fi­nan­cial­ly from the geopo­lit­i­cal ten­sions caused by the war in Ukraine, as cen­tral banks sought to re­bal­ance re­serves away from US dol­lar as­sets.

“In­deed, gold pur­chas­es con­tin­ue to es­ca­late due to un­cer­tain­ties caused by im­pend­ing US tar­iffs and pos­si­ble trade wars. Like many oth­er cen­tral banks, it is im­por­tant for us to proac­tive­ly di­ver­si­fy our re­serves by ac­quir­ing gold, which can help safe­guard us against eco­nom­ic fall­out stem­ming from these tar­iffs.

“There is a pos­si­bil­i­ty that the tar­iffs could send the US in­to a re­ces­sion by dri­ving up busi­ness costs, slow­ing pro­duc­tion, low­er­ing prof­itabil­i­ty, and re­strict­ing firms’ abil­i­ty to hire work­ers. Tar­iffs may al­so trig­ger stagfla­tion—a com­bi­na­tion of re­ces­sion with ris­ing prices—fur­ther in­ten­si­fy­ing US eco­nom­ic pres­sures,” Ar­joon said.

Such out­comes, he said, could in­tro­duce sig­nif­i­cant volatil­i­ty in the val­ue of the US dol­lar and fi­nan­cial mar­kets adding, “Al­ready, we are see­ing stock prices de­clin­ing with each tar­iff an­nounce­ment by Pres­i­dent Trump, while gold prices si­mul­ta­ne­ous­ly rise as cen­tral banks and in­vestors turn to gold to shield them­selves from trade-re­lat­ed risks.

“Our re­serves are heav­i­ly con­cen­trat­ed in US trea­suries and the US dol­lar, and while it re­mains the glob­al re­serve cur­ren­cy, we risk over­re­liance on a sin­gle cur­ren­cy, leav­ing us ex­posed to the ef­fects of a po­ten­tial US cur­ren­cy de­pre­ci­a­tion par­tic­u­lar­ly if a re­ces­sion oc­curs.”

Ar­joon fur­ther not­ed this would di­min­ish the pur­chas­ing pow­er of this coun­try’s for­eign re­serves, re­duc­ing its abil­i­ty to pro­tect against eco­nom­ic shocks.

How­ev­er, he em­pha­sised in­creas­ing T&T’s gold re­serve hold­ings would ef­fec­tive­ly hedge against this risk, as gold is like­ly to ap­pre­ci­ate rather than lose val­ue un­der such con­di­tions.

He added this can help pre­serve the val­ue of the HSF dur­ing mar­ket down­turns, as gold prices typ­i­cal­ly rise dur­ing pe­ri­ods of eco­nom­ic un­cer­tain­ty when stock and bond prices de­cline.

Cap­i­tal ar­bi­trage

Econ­o­mist Dr Vanus James echoed sim­i­lar sen­ti­ments that in terms of cap­i­tal gains or growth of as­set val­ue pre­cious met­als have been per­form­ing ad­mirably in the last decade.

But what do they sug­gest as an in­vest­ment strat­e­gy of a coun­try like T&T?

Should the coun­try now rush to in­clude them in the port­fo­lio of its sov­er­eign wealth fund – the Her­itage and Sta­bil­sa­tion Fund (HSF)?

Should the Cen­tral Bank hold a sub­stan­tial share of its of­fi­cial re­serves in gold?

James said in the nor­mal process of cap­i­tal ar­bi­trage an in­vestor can pur­sue three dif­fer­ent types of re­turns:

1. One is the rel­a­tive­ly safe (low risk) in­ter­est rates of­fered by in­vest­ment in pa­per – bonds, bills, mon­ey mar­ket funds, and the like;

2. An­oth­er is the some­what more risky (more volatile) as­set growth, the kind of cap­i­tal gains that made the pre­cious met­als at­trac­tive in­vest­ments in the last two decades and that now make the cryp­tocur­ren­cies even more promis­ing; and

3. The third type of re­turn is the prof­it rate, and this comes from in­vest­ment in as­sets that on­ly yield a re­turn through the bat­tle of com­pe­ti­tion for pro­duc­tiv­i­ty growth and cost cut­ting, and hence main­ly through in­no­va­tion and in­sti­tu­tion­al re­or­gan­i­sa­tion of pro­duc­tion of val­ue.

James added that all forms of re­turns will val­i­date the un­der­ly­ing in­vest­ment and en­able growth of sav­ings and wealth.

How­ev­er, he not­ed, it is this third type of re­turn and as­so­ci­at­ed sav­ings that is as­so­ci­at­ed with a coun­try’s ca­pac­i­ty to re­struc­ture its econ­o­my, main­ly by shift­ing to pro­duc­tion, ex­port, and em­ploy­ment of cap­i­tal goods and ser­vices.

“It is this that takes ad­van­tage of prospects for grow­ing the qual­i­ty of jobs, in­creas­ing the knowl­edge and skills of work­ers, and in­creas­ing the speed of learn­ing on the job that con­tin­u­al­ly grows the rate of prof­it,” James said.

He not­ed that among these prospects is the like­li­hood that the re­al wage will grow more slow­ly than labour pro­duc­tiv­i­ty, whether mar­gin­al or av­er­age.

“So, it is al­so this type of in­vest­ment that grows a coun­try’s ca­pac­i­ty to gen­er­ate an ever-grow­ing stan­dard of liv­ing for an in­creas­ing num­ber of work­ers and cit­i­zens, while catch­ing up with the ad­vanced economies of the world.

“What is more, this type of in­vest­ment al­so en­ables rapid elim­i­na­tion of the un­der­cap­i­tal­i­sa­tion of work, un­der­em­ploy­ment, ex­ces­sive re­liance on a sin­gle for­eign ex­change earn­er and as­so­ci­at­ed re­peat­ed short­ages of for­eign ex­change to pur­chase nec­es­sary im­ports,” James said.

Thus, he added, if a coun­try finds it­self with the cur­rent prob­lems and re­source con­di­tions of Trinidad and/or To­ba­go, its best choice in the process of cap­i­tal ar­bi­trage is to pur­sue in­vest­ment that yields prof­its.

“The oth­er two op­tions can pro­vide some self-in­sur­ance and im­port cov­er, as does the HSF and the of­fi­cial re­serves, but they promise on­ly growth with­out de­vel­op­ment,” James ex­plained.

He fur­ther not­ed that with the re­cent his­to­ry that promis­es high cap­i­tal gains af­ter ad­just­ing for risk, the pre­cious met­als might be good can­di­dates for con­sid­er­a­tion by the man­agers of the port­fo­lio of the HSF, adding that even the Cen­tral Bank might wish to con­sid­er those cap­i­tal gains when mulling the forms in which to hold the of­fi­cial re­serves of for­eign ex­change.

How­ev­er, he said man­agers of the na­tion­al cap­i­tal ar­bi­trage process would do well to note that adop­tion of a na­tion­al port­fo­lio that em­pha­sis­es growth with­out de­vel­op­ment would be a mas­sive mis­take at this time.

BOX

On whether the bank should ex­pand the HFC port­fo­lio to in­vest in gold, T&T’s Cen­tral Bank stat­ed, “The Cen­tral Bank man­ages the Her­itage and Sta­bil­i­sa­tion Fund in ac­cor­dance with the Her­itage and Sta­bil­i­sa­tion Fund Act, 2007 and the op­er­a­tional and in­vest­ment guide­lines de­vel­oped by the Board of Gov­er­nors.”

The Her­itage and Sta­bil­i­sa­tion Fund is a sov­er­eign wealth fund es­tab­lished in March 2007 by the Gov­ern­ment. It was pre­vi­ous­ly known as the In­ter­im Rev­enue Sta­bil­i­sa­tion Fund, set up in 2000.