Gold Rush: Incentivising Foreign Investors as a Nation

Abstract

This thesis proposes a different explanation than the common finance literature on the observation of increasing gold reserves of central banks and nations. Instead of arguing gold’s hedging capabilities, we explain this phenomenon by the nation’s rational to reduce its equity financing costs. The mechanism behind is that gold reserves signal monetary credibility, thereby influencing investors’ perception on the nation’s domestic currency value. Adopting Bolton and Huang’s (2018) paper “The Capital Structure of Nations”, we derive under which circumstances the acquisition of gold is beneficial as well as its implications on the nation’s optimal capital structure.