Central banks turn to gold as geopolitical uncertainty lingers
Central banks across the world continued the gold buying spree this year, adding 290 tonnes in the March quarter, even as record high prices hit consumer demand.
Central banks accounted for 23 per cent of the overall gold offtake at 1,238 tonnes in the March quarter. Central banks accelerated their bet on the yellow metal and accounted for almost a quarter of the annual gold demand in the last two years.
In the March quarter, 10 central banks added gold with the central banks of Turkey, China and India leading the way. The RBI bought 19 tonnes, while Central Bank of Turkey and People’s Bank of China purchased 30 tonnes and 29 tonnes, respectively.
This marks the 17th consecutive monthly increase, with central banks’ gold holdings rising to 2,262 tonnes — about 16 per cent higher than as of October 2022, when they resumed reporting monthly additions, said the World Gold Council.
Apart from the dollar’s weakness against major currencies, the significant gold purchases by central banks have also been a driving force behind the rise in prices of the yellow metal.
Gold prices increased 10 per cent to $2,070 ($1,860) an ounce in the March quarter, while it was up 8 per cent to $1,940 ($1,800) in 2023.
HEDGING TOOL
Rattled by geo-political developments and disturbed by a slowing economies, central banks have been hedging their risk by increasing the gold component of their forex reserves.
Madan Sabnavis, Chief Economist, Bank of Baroda, said the RBI is strategically increasing gold reserves as part of its forex diversification effort and a major portion of RBI’s reserves is in dollar apart from other currencies. Gold is the best hedge as it goes up when the dollar depreciates, he added.
With the recent surge in dollar volatility and the upward trajectory of gold prices, the move not only enhances the stability of foreign exchange reserves, but also makes it a prudent financial decision, said Sabnavis.
Sachin Jain, Regional CEO India, World Gold Council, said the central banks’ gold purchases are not influenced by rising prices, though some of them may take a pause depending on their strategy. Central banks’ appetite for gold has been one of the key drivers of its recent performance in the face of seemingly challenging conditions including higher yields and US dollar strength, he added.