Central banks betting big on gold amid global uncertainty

Purchases hit a 3-year high in 2018 as trade tensions and volatile yields kept markets on the edge

Central banks across the world seem to be aggressively adding gold to their foreign exchange (forex) reserves. Last year (till November), their net gold purchases stood at 480 tonnes – the highest since 2015, according to data from the World Gold Council (WGC).

Following the global trend, the Reserve Bank of India (RBI) has also started adding gold to its reserves, and in little less than a year, the RBI has added nearly 40 tonnes. The share of gold in the RBI’s forex reserves rose to 5.9 per cent, taking its total gold holding to 592 tonnes in November.  

“Central bank buying has strengthened recently and appears to be accelerating further. The motivations for buying gold differ between countries. Central banks have three main objectives when they are thinking about reserve assets: to keep their assets safe, liquid, and generate returns. Gold can help meet all three policy objectives,” Natalie Dempster, managing director, central banks and public policy, WGC, told Business Standard.

Industry experts say the yellow metal can play a new role in the changing international financial system. The global financial system, they say, will evolve from the current unipolar (dollar-dependent) system into a multi-polar reserve currency structure. 

And given the uncertain future, central bankers are adding gold to their reserves as a hedge. There are also apprehensions about further volatility or a correction in the stock market, and bankers don’t want to be caught unawares like they were in 2008. 

“Given the backdrop of a global trade war, ongoing US sanctions, volatile dollar and yields, it’s not su­r­p­rising that central banks are looking to increase their safe haven exposure in the form of gold while reducing their exposure to foreign exchange reserves,” added Debajit Saha, senior analyst, precious metals demand, GFMS Thomson Reuters.

According to Dempster, a lot of these purchases have been driven by growing recognition among central banks that currencies like China’s renminbi will play a much greater role in reserve portfolios. 

“However, the exact path that the world takes in getting to the new system is highly unclear. It could well see bouts of currency instability, as large changes are made in reserve asset compositions and even as speculation about prospective changes ebb and flow. Gold’s role as a traditional hedge could prove very valuable to central banks during this transition period,” added Dempster.  

In 2008 and 2009, when global financial markets seized up, central bankers were caught unawares. They went back to the yellow metal for the next few years. And by 2013, central banks’ net gold addition peaked at 625 tonnes. 

With trade tensions between the US and China persisting and the future of Brexit remaining uncertain, bankers are seeking gold with renewed interest. Sources tracking bullion movement said India’s official gold holding was expected to have crossed 600 tonnes and 6 per cent of the forex reserves in the month of December.

According to the WGC report, the National Bank of Hungary also cited gold’s role as a hedge against future structural changes in the international financial system when it announced its tenfold increase in gold reserves in October. 

A decade back, the euro had emerged as a strong alternative to the US dollar for central banks’ forex reserves and several banks started adding the euro to its reserves but that didn’t last long.