Investment Commentator Klement: Research Shows Gold Reserves Do Not Significantly Protect Exchange Rates Against Unexpected Federal Reserve Rate Hikes
Joachim Klement interprets research by Aizenman et al. (2026): For every one standard deviation increase in US dollar reserves held by emerging market central banks, the depreciation of their currencies is reduced by 0.1 percentage points when the US Federal Reserve unexpectedly raises interest rates by 10 basis points; while the buffering effect of gold reserves is numerically similar to that of general foreign exchange reserves, it has higher statistical uncertainty and is not statistically significant. Klement argues that foreign exchange markets appear to treat gold as a liquidatable indirect US dollar asset, which does not truly enhance exchange rate stability compared to directly holding US dollars.
Gold bulls sometimes argue that central banks should increase their gold reserves, with one reason being that when the US Federal Reserve makes unexpected monetary policy adjustments, gold can simultaneously protect against both domestic currency depreciation and US dollar depreciation. Joachim Klement cites research by Aizenman, Saadaoui, Uddin, and Yago to quantitatively test this argument, concluding that the results do not support the superior protective role of gold.
The research team examined the exchange rate performance of emerging market central banks when the US Federal Reserve unexpectedly raised interest rates by 10 basis points. The core mechanism is intuitive: if a central bank holds more foreign exchange reserves, it can sell foreign currency and buy back its own currency when facing depreciation pressure on its domestic currency, thereby stabilizing the exchange rate. Data shows that for every one standard deviation increase in foreign exchange reserves (roughly corresponding to 20 percentage points), the depreciation of the exchange rate decreases by 0.04 percentage points.
However, the key lies in the currency composition of the reserves. For every one standard deviation increase in US dollar reserves, the depreciation of the exchange rate decreases by 0.1 percentage points—an effect more than double that of general foreign exchange reserves. The impact of non-dollar foreign exchange reserves is minimal and statistically insignificant. Klement points out that this aligns with intuition: since central banks are countering US dollar appreciation pressure, directly holding US dollar liquidity naturally provides the strongest intervention firepower.