In many parts of the world, central banks hold gold as part of their foreign reserves. Gold is widely recognized as a hedge against inflation, currency devaluation, and geopolitical uncertainties. Countries such as Germany, France, and Italy have gold reserves comprising 60–70% of their total reserves. However, one notable financial hub stands apart from this trend—Hong Kong. Despite being a wealthy city with a highly advanced financial system, Hong Kong holds almost no gold. While it technically does have some, the amount is negligible—just 2.08 tonnes, valued at approximately $135 million at current market prices.
Hong Kong’s Unique Monetary System
To understand why Hong Kong holds such a small amount of gold, it is essential to examine its economic and monetary structure. Hong Kong operates under a currency board arrangement, a system in which the local currency—the Hong Kong Dollar (HKD)—is fully backed by foreign exchange reserves and pegged to a foreign anchor currency. Initially, the HKD was tied to the British pound, but in 1983, it was pegged to the U.S. dollar at a fixed rate, currently maintained within a narrow band of HKD 7.75–7.85 per USD.
The decision to implement a currency board was driven by the need to instill confidence during economic uncertainty and speculative attacks. In the early 1980s, Hong Kong experienced rapid currency depreciation due to regional instability and political concerns over the impending handover from Britain to China. To maintain monetary stability, Hong Kong authorities adopted the peg as an anchor. Over time, this credibility was reinforced by conservative monetary policies and ample foreign exchange reserves.
The Role of the Exchange Fund
Another key aspect of Hong Kong’s financial system is its Exchange Fund, managed by the Hong Kong Monetary Authority (HKMA). The Exchange Fund plays a crucial role in maintaining the stability of the HKD by intervening in the foreign exchange market when necessary. While the Exchange Fund does hold some gold, the vast majority of its assets are in liquid financial instruments such as U.S. Treasury bonds, foreign currencies, and other stable investments.
The fundamental reason for prioritizing liquid financial assets over gold lies in the immediate need for liquidity. The Hong Kong Monetary Authority frequently intervenes in the market to defend the currency peg against external pressures, including speculative attacks, capital flows, and global interest rate fluctuations. Unlike gold, which takes time to convert into cash, U.S. Treasuries provide both liquidity and interest income, making them far more useful for defending the peg.
If Hong Kong held large amounts of gold instead of liquid reserves, it would struggle to respond quickly to market volatility. A delay in intervention could result in instability, loss of confidence in the peg, and a potential devaluation of the Hong Kong dollar.
Why Doesn’t Hong Kong Follow China’s Gold Strategy?
China has been aggressively increasing its gold reserves while reducing its holdings of U.S. Treasuries. This is part of a broader de-dollarization strategy aimed at reducing dependence on the U.S. financial system. However, despite being a Special Administrative Region (SAR) of China, Hong Kong’s monetary policies remain distinct.
Hong Kong is not a fully independent economy; its financial policies are shaped by its role as a global financial hub. Unlike China, which can afford to prioritize gold as a strategic asset, Hong Kong must prioritize currency stability to maintain investor confidence and economic competitiveness. With the peg to the U.S. dollar still in place, the Hong Kong Monetary Authority sees no urgent need to shift toward gold.
Will Hong Kong Increase Its Gold Reserves in the Future?
Given Hong Kong’s substantial foreign exchange reserves—which have grown from $24.66 billion in 1990 to over $425 billion in 2023—it certainly has the financial capability to increase its gold holdings. However, the HKMA has repeatedly stated that the Linked Exchange Rate System remains robust and that the current asset mix, heavily weighted toward U.S. dollar securities, is the optimal strategy for maintaining monetary stability.
While China’s de-dollarization efforts could influence Hong Kong’s future financial decisions, there is no indication that the Hong Kong authorities plan to significantly increase their gold reserves anytime soon. The city’s negligible gold holdings are not a sign of oversight or disregard for gold’s historical importance but rather a deliberate policy choice designed to uphold the stability of its monetary system.
Conclusion
Hong Kong’s lack of significant gold reserves is a direct consequence of its currency board system, reliance on liquid financial instruments, and commitment to maintaining the peg to the U.S. dollar. Unlike other global financial hubs such as Singapore and Switzerland, which hold large gold reserves, Hong Kong’s financial strategy prioritizes liquidity and stability over gold accumulation.
As China continues to push for de-dollarization, it remains to be seen whether Hong Kong will shift its stance on gold. However, for now, the city’s authorities remain focused on defending their monetary system rather than accumulating gold. What do you think? Should Hong Kong follow China’s lead and increase its gold holdings, or is its current strategy the right choice?