Why are RBI, other banks on a gold- buying spree?

The Reserve Bank of India (RBI), like most other global central banks, is on a gold buying spree. According to a latest note by the World Gold Council (WGC), the RBI bought 19 tonnes of gold in the first quarter of the current calendar year 2024 (Q1-CY24 / Q4FY24). This dwarfs the 16 tonnes of gold it bought in the whole of 2023, the WGC note said.

With central banks accelerating their gold purchases to above 1,000 tonnes per year in 2022 and 2023, WGC believes the market is finally beginning to appreciate the importance of their contribution to gold demand. “Accounting for almost a quarter of annual gold demand in both those years, many have attributed central banks’ ongoing voracious appetite for gold as a key driver of its recent performance in the face of seemingly challenging conditions: namely, higher yields and US dollar strength,” the WGC said.

Not only is the long-standing trend in central bank gold buying firmly intact, it also continues to be dominated by banks from emerging markets (EMS), as per the WGC report. Ten central banks reported increased gold reserves (of a tonne or more) during the March 2024 quarter, according to the WGC data, all of whom have been active over recent quarters.

Central bank net demand totalled 290 tonnes in the March 2024 quarter, up 1 per cent as compared to 286.2 tonnes in the previous corresponding period and was the strongest start to any year on record, WGC said. Gold buying by central banks in the March 2024 quarter was 69 per cent higher than the five-year quarterly average (171 tonnes), shows data. “Reported purchases remained broad-based, with China, Turkey and India leading the way. The strong start reinforces our view that central bank demand will remain robust in 2024,” WGC said.

Why is the RBI buying gold?

According to Madan Sabnavis, chief economist at Bank of Baroda, there are two main reasons why central banks, including the RBI, have been buying gold. First, ever since the US put an embargo on payments to Russian companies through SWIFT as well as froze Russian assets in US treasuries, countries are looking to diversify their forex assets.

“Investing in US Treasuries may not be technically secure now given the escalation of geo-political tensions in the world. Gold has become a go-to place for most central banks now, including the RBI, and is a good asset when it comes to diversification. The move away from the US dollar to other currencies (for forex) has not happened yet though countries like India are trying to internationalise the rupee,” Sabnavis said.

That apart, gold’s appeal as an asset, Sabnavis said, has become better. Gold is agnostic to its holder as opposed to currency, like US treasuries, and will always appreciate in value over time. “Though central banks will not look out for returns, value-wise they will always be better off in the long run,” Sabnavis said.

Within the Asian region, People’s Bank of China (PBOC) added 27 tonnes to its gold reserves during the March 2024 quarter, shows WGC data. “This marks the 17th consecutive monthly increase, helping to lift its reported gold holdings to 2,262 tonnes (16 per cent higher than at the end of October 2022 when it resumed reporting monthly additions). The data indicates that this is the PBOC’S longest ever reported streak of monthly additions to its gold reserves,” the WGC said.

Meanwhile, heightened geopolitical tensions in a key election year for many major economies, combined with continued central bank buying, analysts believe, could support gold prices going ahead.