Foreign Exchange Reserves by Currency

Here is a great chart from the IMF that shows a breakout of foreign exchange reserves by currency. The key takeaway from the data is that the euro has increasingly grown its share of foreign exchange reserves over the last five years. As of Q4 2009, the euro accounted for 27.4% of foreign currency reserves vs. 24.0% in 2005. Conversely, the dollar’s share of foreign currency reserves has shrunk from 66.9% in 2005 to 62.1% as of Q4 2009. Collectively, the two currencies account for 89.4% of total foreign reserves, with the pound (4.3% of total), yen (3%), and other miscellaneous currencies accounting for the remainder.

Given recent events in the euro zone, I would imagine we see a reallocation away from the euro into the dollar, yen, and hard currencies. Perhaps the biggest beneficiary will be gold, which as I write this post is making new all time highs.

As I have suggested in prior posts, most Asian nations (China, Japan, India, Taiwan) remain grossly underinvested in gold relative to their Western brethren. China is the most glaring example of this with less than 2% of its foreign exchange assets in the yellow metal. Conversely, the US, Germany, France & Italy all maintain gold in excess of 65% of their total reserves. While China is unlikely to get to this level anytime soon, even a relatively modest move to 10% would require the purchase of 4,500 additional tons or nearly two years of total global production (note: annual production of gold is approximately 2,500 metric tons). The implications of this strategic move on the price of gold would be massive.