Finance Update

Gold: Central banks giving much-needed boost to gold demand

Last year, central banks added an incredible 651.5 tonnes

gold

to their holdings. This is a 74 per cent increase from 2017.

Percentage wise, that’s highest since President Nixon formally ended the gold standard. In the last quarter of 2018, central banks purchased 195 tonnes — most for any quarter on record. Gold yields nothing and its price is based on sentiment alone.

Warren Buffet hates gold as it does not have any utility. John Maynard Keynes called gold a ‘barbarous relic’. So, why are central banks rushing to buy gold?

This is not a new phenomenon. In fact, central banks started buying gold from 2010 in an effort to diversify their reserves away from the US dollar.

Most western nations have not added gold reserves, but it’s from emerging markets where demand is coming from. The biggest purchasers were Russia, China, Turkey and Kazakhstan. India, Poland and Hungary took deliveries of gold for the first time in a decade.

The Russian Central Bank has for six consecutive years have bought gold as it continues to diversify away from US dollars and is converting those dollars into gold holdings. China is another country which has boosted its gold reserves by adding 32 tonnes in the past three months. Its overall holding is 1,874 tonnes, which might not be true as China had not updated their gold reserve for more than two years before December 2018.

RBI bought gold for the first time in a decade as it added 8.46 metric tonnes of gold to its stock of holdings during 2017-18, taking the level of gold reserves to 566.23 metric tonnes.

European nations that were early to buy gold in the decade are Hungary and Poland since the start of the century. Hungary not only bought gold for the first time in 32 years, but increased its total holdings by 10 times.

Even with the introduction of the euro, the US dollar maintained its status as the world’s reserve currency. This means the US has continued to enjoy its privilege of demand for the dollar, enabling to finance itself cheaply in global markets.

But now, the world is shying away from the dollar, whose use in global trade is declining. According to the international payments operator SWIFT, the greenback’s use in global trade is down by 40 per cent in 2018. So, central banks which are at loggerheads with the US have started dumping dollar from their foreign reserves.

Russia, China, Kazakhstan and Turkey are the examples. The trend is a proof that the reserve holdings of the dollar will align with its use in trade over time.

When the central bank started buying gold in 2010, the floor price of $1,000 was set. Now central banks have aggressively started buying gold. So, gold prices are expected to remain well supported.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of

www.economictimes.com

.)

Source

Prakash Poojary
Business Analyst

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