SHORT STORY
TWHAT
After a subdued start to the year, gold prices started gathering steam in early March. As of 9 April, gold had made fresh lifetime highs for eight straight sessions.
WHY
Some attribute the rally to expectations of interest rate cuts by US Fed, which would make the non-yielding yellow metal more attractive. Others point to rising geopolitical tensions.
NOW
All central banks are stocking up on gold. When central banks buy gold, it is usually a carefully considered move. Do they know something the rest of the market does not?
the yellow metal—the most among global central banks, according to the World Gold Council. China’s purchases last year were about a quarter of the 1,037 tonnes bought by all the world’s central banks. In January and February this year alone, the PBC increased its gold reserves by 22 tonnes. It has been adding to its gold reserves for the past 17 months. The Chinese central bank’s total gold holdings stand at about 2,257 tonnes.
What explains Beijing’s love for bullion?
Experts put this down to its battle of supremacy with the US and the broad trend of de-dollarization. China, like most countries, is heavily dependent on the US dollar for global trade. The greenback is the world’s reserve currency and holds a virtual monopoly in the global financial architecture. However, as the covid-19 crisis and Russia-Ukraine war showed, Washington does not shy away from weaponizing the dollar to sanction countries and maintain its hegemony.
Beijing, which has over the decades built huge forex reserves in dollars, is now seeking to diversify its holdings and insulate its financial sector.
“China is the largest producer of gold in the world, but its central bank has still been at the forefront of a surge in purchases of the precious metal on the international market since past 17 consecutive months as it seeks to reduce its reliance on the dollar and diversify its holdings in reserves,” AnandRathi’s Mathur said. “Its gold rush could also be an attempt to shore up its fiscal position with a stable and highly saleable asset as bond markets have suffered since 2022,” he added.
FLASHING RED?
he current trend of gold buying is not limited to China. All central banks are stocking up on this asset.
Prior to 2022, there wasn’t a single year when global central banks cumulatively bought 1,000 tonnes of gold. But in 2022 and 2023, central bank purchases stood at 1,081 tonnes and 1,037 tonnes, respectively.
When central banks buy gold, it is usually a carefully considered strategic move. They don’t buy gold for short-term trading or profit-booking. It is either to safeguard their currencies, diversify their reserves or hedge geopolitical risks. Sometimes all of the above.
This is what is making many market watchers nervous.
Does the scale of gold buying indicate central banks are not quite gung-ho about the future? Do they know something the rest of the market does not? Remember, central banks are the most sophisticated institutions in the global financial landscape.
“There is a rising risk regarding war. New ‘Iron Curtains’ are being built unfortunately. The gold price is perhaps also signalling that the next wave of inflation is starting,” Incrementum AG’s Stöferle said.
Gold is possibly a more accurate ‘fear gauge’ than VIX—the Chicago Board Options Exchange’s CBOE Volatility
Index, which is the most popular measure of the stock market’s expectation of volatility.
Here’s a snapshot of the previous times when the yellow metal hit lifetime highs—1970s (after the ‘Nixon shock’ ended the convertibility of the US dollar to gold); 2008 (global financial crisis); 2011 (European debt crisis) and 2020 (covid-19 outbreak).
Correlation does not mean causation, of course, but it is safe to say shining gold prices have almost always been accompanied by some very grim news.
What is the bullion market nervous about currently? The risk of a wider conflagration in the Middle East? Sabre rattling by Vladimir Putin and Xi Jinping? The US-China rivalry spiralling into a major showdown? Or is it betting that the US economy will not achieve a ‘soft landing’, no matter how buoyant Fed chair Jerome Powell sounds?
The correct answer(s) will be known only in hindsight, but experts are voicing some concern about the medium-term outlook.
“The probability of a hard landing in the US economy this year still persists given the fact that historically, the Fed has managed a soft landing only twice following nine previous tightening cycles over the past five decades. The other seven had ended in a recession making a hard landing scenario still feasible this year,” Mathur added.
DOMESTIC DOUBTS
Gold buyers in emerging markets like India have to contend with an additional factor which exerts upward pressure on prices—currency depreciation.
The rupee has been weakening against the US dollar, in line with most emerging market currencies, which makes purchases of dollar-priced commodities like crude oil and gold more expensive.
Gold prices breached the ₹72,000 per 10gm mark, while silver topped ₹84,000 per kg on 12 April—both record highs. The yellow metal is up around 15% year-to-date.
That said, India’s age-old cultural affinity with gold makes demand pretty inelastic.
Indian gold demand, which has been in the range of 700800 tonnes annually since 2019, is expected to increase to 800-900 tonnes in 2024 on the back of robust economic growth and higher income, as per the World Gold Council.
However, for investors itching to participate in the redhot rally, caution is the keyword.
“While transition to lower interest rates bodes well for gold, much of it seems to have already been priced in. This could limit the upside for the precious metal going forward,” said Chirag Mehta, chief investment officer, and Ghazal Jain, fund manager, Quantum AMC.
Further, meaningful upside from these levels can come on the back of a more dovish stance by the US central bank in response to a sharp deceleration in growth or a financial accident.
“On the other hand, if the Fed doesn’t meet the market’s expectations with regards to quantum and timing of rate cuts, given that inflation continues to be sticky above its target, gold could see some consolidation,” they added.
Source: MyMoneyMantra.com
Gold is possibly a more accurate ‘fear gauge’ than VIX—the most popular measure of the market’s expectation of volatility.