It is very important to understand why actually GOLD matters in a NATIONS ECONOMY and what GOLD RESERVES are and how it affects value of a NATIONS currency in International trade.
GOLD RESERVE ( refer Wikipedia for more details ) : basically means GOLD held by the central bank ( in INDIA it is Reserve Bank of India : RBI ) intended as a store of value and as a guarantee to redeem promises to pay depositors, note holders ( paper money ) or trading peers or to secure a currency.
In short : Every country has been following a tradition of reserving certain amount of GOLD in order to print Currency Notes ( A Nation cannot simply print currency notes just because it has paper and printer 😛 if it does Liquidity in the market increases and value of the Currency falls down and the ultimate effect you all can guess)
The logic behind GOLD reserves : Just like when you approach a Bank for Loan , they in return ask for surety or a promise ( may be in terms of another person signing the loan form or your house itself as a surety etc ) from you that you will pay back the amount. In the same manner it has been the tradition of having a certain amount of GOLD reserves in order for a Country to print currency notes.
What does a Foreign Exchange Reserves mean ( also known as Forex reserves or FX reserves ): basically assets held by Central Banks and Monetary usually in different reserve currencies ( US dollar, euro , UK pound sterling, Japan yen ) used to back its liabilities ( local currency issued ) For INDIA it is the IMF ( International Monetary Fund ) For Germany it is the BUNDESBANK , For Italy it is the Bank of Italy and so on..
As i started writing this article i realized i could not squeeze everything in under 500 words or so because it is essential to understand GOLD value trading in a Nations Economy. Once this becomes clear to you all the next couple of articles will give you insight as to why the GOLD prices in international market is decreasing day by day, ( You might have already noticed GOLD value ( Rs / 10gm ) has decreased from almost Rs 33,500 from January to Rs 26,200 ( rough figures ) as of today.
Part 2 of this Article will be about TOP 10 Countries with the biggest official GOLD holdings as reported by WORLD GOLD COUNCIL as of January 2013 and with a twist. ( Time for Numb3r Crunching and Statistics ) 🙂