Currency reserves consist primarily of freely disposable foreign exchange reserves and of gold holdings. In retrospect, we have to remember that our freely disposable foreign exchange reserves have undergone a substantial increase, particularly after the transition to freely floating exchange rates a quarter of a century ago. At the beginning of the nineties, we therefore decided to limit future expansion to the extent of nominal economic growth. By international standards, we thus have a comfortable level of reserves. As regards gold holdings, it must be decided what proportion will still be required for monetary policy purposes in future or, conversely, what proportion should become available for other public uses. This is basically a question of how an important part of our national wealth is to be usefully employed. Both fundamental considerations and a comparison with other countries may be helpful. However, in the final analysis there is a discretionary decision to take. We have come to the conclusion that it would be appropriate to maintain around half of today’s gold holdings of approximately 2,600 tons as currency reserves. In principle, we are in favour of removing the other half of this gold from our balance sheet. However, we are willing to accept that, in a broader perspective, it may not be appropriate to outsource. In such a case, the gold holdings would have to be managed according to special criteria by external specialists under the responsibility of the National Bank.
8  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  8  Uncertainty is very high From the rising spectre of global terrorism to intensifying geopolitical tensions and financial crises, for too long, for far too many people, the world seems to be getting riskier. They are right. Currently, on average across Europe and the US, policy uncertainty is around 1.5 standard xx  deviations above its historical average. In the UK, we expect currently elevated levels of uncertainty to cut 7% from investment over the next three years and 1% from GDP. Higher uncertainty has contributed to what psychologists call an affect heuristic amongst households, businesses and investors. Put simply, long after the original trigger becomes remote, perceptions endure, affecting risk perceptions and economic behaviour. Just like those who lived through the Great Depression, people appear more cautious about the future and more reluctant to take irreversible decisions. That means less willingness to put capital to work and, ultimately, lower growth. These dynamics are clearly visible in financial markets. As one illustration, for two-and-a-half centuries, the prices of government bonds and the prices of equities tended to move together: the typical bull market entails rising equity prices and falling bond yields, with the reverse in bear markets (Chart 11). Since the mid-2000s, however, this pattern has reversed and bond yields have tended to fall along with equity prices.