Modnath Dhakal
In the long run, gold offers more stability than forex reserves. It serves as a hedge against currency devaluation and protects the country from sanctions risks associated with foreign currencies like the US dollar.
The use of money is a comparatively recent phenomenon compared to the span of human civilization. Humans began to use money in business transactions about five thousand years ago. Before that, bartering—the direct exchange of goods or services—was in use. The barter system was a complex mechanismbecause it required a mutual need for goods or services from both parties. The requirement of one party was not sufficient for a trade to occur.
For example, if one person had corn and wanted a pair of shoes in exchange, they first had to find someone who could make the shoes and, also, wanted corn. Additionally, the value of both goods had to be determined in a way acceptable to both parties. Sometimes, one party had to wait until they could find a matching offer.
Money, as a medium of exchange, simplified transactionsgoods and services. It is centralized and accepted by the public in many countries. Although there is growing discussion about the use of Bitcoin—a form of cryptocurrency not controlled by any individual or institution—money remains largely under the domain of the central banks of countries around the world. Meanwhile, central bank-issued digital currencies have also emerged in some countries, with India and China piloting such projects. The Nepal Rastra Bank (NRB) is also working on its development, expected to launch around 2026.
The advent of money simplified trade and created a level of market stability. As money carried a more stable value and was easier to carry, it also promoted cross-border trade. This, in turn, expanded economic activities and propelled growth and development, albeitgradually at first.
Experiment with Money
Human beings have experimented with various objects as money. While grain and cattle remained primary mediums of exchange until around 1200 BCE, cowry shells were first used as currency in China, and eventually spread across the Silk Road trade routes.
By 900 BCE, bronze objects were used as money in China. In Lydia (now Turkey), the first standardized coins made from electrum were issued during the regime of King Alyattes and Croesus around 600 BCE. It was the first coin made from a mix of gold and silver. In the following centuries, punch-marked silver coins were used in the Mahajanapadas of modern-day India, silver coins circulated in Rome, and round coins with square holes became common in China. The Roman Empire used gold and silver coins from the first century, but paper currencies were first used in China—from early promissory notes in the 7th to 9th centuries to official paper money in the 11th century. However, banks and banknotes did not appear until 1661.
For a long time, gold served as the standard for trade and wealth storage, although it was not initially tied to currencies as a reserve asset. Before the 1800s, empires and kingdoms hoarded gold in treasuries to support trade and fund wars.
The Gold Standard and Its Demise
By the nineteenth century, many countries had adopted the gold standard, linking their currencies to a fixed amount of gold. For example, the United Kingdom formally adopted this model in 1816. The Bank of England began holding gold reserves to back its currency and ensure convertibility, marking the beginning of modern gold reserves. The practice soon spread to other countries – including Germany, the USA, and France – helping stabilize currencies and ensure convertibility to gold.
With the execution of the Gold Standard Act in 1900, the USA backed its paper currencies with gold, making it the sole standard of value, thereby replacing silver. At that time, the fixed value of the US dollar was $20.67 per ounce (28.35 grams) of gold. This required the US Treasury to maintain gold reserves proportional to the notes in circulation, ending the confusion of bimetallism.
This policy strengthened trust in the US dollar as a widely accepted global standard and helped to stabilize the US economy. However, President Franklin D. Roosevelt ended the gold standard in 1933 during the Great Depression. To stabilize the economy, he nationalized gold by banning private ownership and compelling citizens to sell their gold to the government.
After the World War II, the Bretton Woods System—known as the global monetary system formed in 1944 to create a stable international financial order in the aftermath of the devastating wars—set up the US dollar as the global reserve currency, pegged to gold at $35 per ounce. Other currencies were pegged to the dollar. This not only established the US dollar as the global primary reserve currency but also reinforced gold’s role in international finance. In other words, only the US dollar was directly convertible to gold, while other currencies were pegged to the dollar, not directly to gold. Since then, the US dollar has been the dominant currency in the global economy.
However, this system couldn’t last long. The USA started printing more dollars than its gold reserves could back, owing to increased military spending, particularly in the Vietnam War, Cold War programmes, and national development needs. When other countries began demanding gold in exchange for their dollar reserves, President Richard Nixon cancelled the dollar-to-gold convertibility in 1971, sending shock waves across the globe. This ‘Nixon Shock’ officially ended the gold standard and heralded the era of the floating exchange rate system, which still prevails today.
Gold’s Strategic Relevance
Gold price per tola (11.7 grams) in Nepal dropped to around Rs. 84,000 on May 2 after reaching an all-time high of Rs. 197,900 on April 22 this year. Globally, the price of the yellow metal increased by more than US$ 300 from April 2024 to May 2025. According to Gold Price, the quarterly average price of gold in the first quarter of 2025 increased by 38 per cent on a year-on-year basis. Disturbances in international trade caused by US tariffs, geopolitical uncertainty, stock market volatility, and a weak US dollar fuelled the upsurge.
Due to its scarcity, gold commands public reverence, as people associate it with divinity and blessings, and use it in vital life events. From royal burials in ancient Egypt about five millennia ago to modern-day weddings and religious ceremonies in Nepal and India, gold has never lost its symbolic value and material worth.
Following the collapse of the gold standard, most countries began adopting fiat currencies. However, they continued amassing gold as a reserve asset for economic stability and hedging against uncertainty. A couple of incidents further enhanced the importance of gold. In the 1990s, central banks of countries like the United Kingdom and Switzerland sold a portion of their gold reserves, believing that the dominance of the US dollar reduced gold’s necessity. This move temporarily sent gold prices down.
On the contrary, after the 2008 global financial crisis, rising economies like China, India, and Russia started procuring gold aggressively to create an alternative to the US dollar, pushing gold prices up. Currently, the US-China trade war, Russia’s invasion of Ukraine, and disturbances in international trade caused by recent tariff hikes by the USA (and retaliatory actions by many other countries) have again forced countries to increase their gold reserves.
Rising economies, including the BRICS nations (originally Brazil, Russia, India, China, and South Africa, later joined by Egypt, Ethiopia, Iran, and the United Arab Emirates in 2024), are working to reduce their dependency on the dollar. As a result, gold remains as a key reserve asset for central banks around the world. It is estimated that central banks collectively hold about 36,000 tonnes of gold, with emerging economies exhibiting a growing appetite for the bullion.
Meanwhile, the share of US dollars as the foreign exchange reserves is gradually declining, particularly for the above-mentioned reasons. According to statistics from the International Monetary Fund (IMF), about 58–60 per cent of the global foreign exchange reserves are held in US dollars. This was around 66 per cent in 2015.
Countries are working on their strategies to diversify their foreign exchange reserves into Euros, Yuan, and gold. As discussed earlier, the Bretton Woods System paved the way for dollar dominance, and trust in it was heightened by the USA’s large and stable economy with strong institutions. Likewise, the US Treasury market is the most liquid bond market, which facilitates central banks to easily manage their treasury securities. Countries hold dollars to pay for international trade and stabilize exchange rates, while about 65 countries or territories have pegged or closely linked their currencies to the US dollar.
Gold, Fiat, and Cryptocurrency: Comparing Modern Assets
Present-day fiat money is not backed by gold, while a large share of the economy is constructed with bank money. This type of money survives on the government’s declaration of it being legal tender for payments and debts, public acceptance of it for exchange of goods and services, and the support of the stability and credibility of the issuing government—the NRB, in the case of Nepal.
Compared to cryptocurrency and gold-backed money, fiat currency has moderate stability, flexible supply, and ease in daily trading activities. On the other hand, cryptocurrency has high volatility, a decentralized system, and limited supply. Although gold provides high stability in the currency market, gold-backing requires physical gold reserves with central banks and is limited by the quantity of such reserves.
The yellow precious metal is seen as a hedge against inflation and is a trustworthy asset, which bolsters trust in economic stability. Gold reserves are reliable assets that can sustain an economy during times of high fluctuation in foreign exchange rates. However, it is difficult to convert large amounts of gold into cash currency, and unlike foreign currency, gold does not generate any income. Foreign currencies, on the other hand, can be used to pay for imports, invested in treasury bonds or other financial instruments to earn income, and help stabilize exchange rates and facilitate market interventions. But fluctuations in the value of foreign currencies can weaken the reserves, while international inflation and economic slowdowns can also significantly impact them.
Yet, a 2023 report by the World Gold Council (WGC) found that 68 per cent of central banks surveyed expected their gold holdings to increase over the next five years. This suggests that reliance on the US dollar will further decline. The WGC has recommended that a 5–20 per cent share of gold in total reserves is reasonable for most countries. It further noted that increasing gold holdings by 2–10 per cent can enhance returns and reduce portfolio volatility over the medium to long term. According to the WGC, emerging economies like India and China should increase their gold reserves to 10–15 per cent of their total portfolios, up from their 2017 ratios of 5.8 per cent and 2.3 per cent, respectively.
The Nepal Case
Economists and experts suggest that central banks avoid full reliance on either gold or foreign currencies. Rather, they need a mix of both to reduce risk and ensure liquidity and stability. Since neighbouring giants China and India also resort to this strategy, Nepal should continue with this policy.
It is also important to note that foreign exchange reserves are more suitable for countries that rely heavily on imports of goods and services. This means Nepal should have a good reserve of US dollars and Indian rupees. However, in the long run, gold offers more stability than forex reserves. It serves as a hedge against currency devaluation and protects the country from sanctions risks associated with foreign currencies like the US dollar.
In the short and medium run, Nepal will benefit from the high inflow of remittances, which is among the highest in terms of the GDP-to-remittance ratio. For an import-dependent country like Nepal, a 5–10 per cent share of gold in its reserves would be sufficient. But in the long term, it must devise a strategy keeping in mind international trade dynamics, geopolitical developments, and other strategic factors.
The IMF advises countries to maintain diversified reserves to cushion against external shocks and minimize volatility during financial crises. Similarly, the Bank for International Settlements has recommended a gradual diversification toward major currencies other than the US dollar. This strategy can improve resilience without compromising liquidity.
Asglobal trade patterns shift, many emerging economies are increasing their holdings in Chinese Yuan. In such a scenario, gold serves as an insurance policy against extreme events like currency wars or inflation crises, says American economist Kenneth Rogoff. According to him, gold is undervalued as a reserve asset, when viewed in the context of its historical importance.
@ModDhakal
(Mr. Dhakal is a journalist at The Rising Nepal daily and immediate past President of Nepal Association of Financial Journalists-NAFIJ)
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