Central banks in buying spree for gold in Q1
Many countries preferring to increase yellow metal holdings and decrease dollar holdings owing to several reasons such as possible fall in dollar interest rates, surging gold price, sanctions by US and West European countries
The quantum of central bank buying in the last two calendar years, 2022 and 2023, has been the same. In fact, 2023 was a shade lower -Joseph Thomas, head (research) at Emkay Wealth Management, tells Bizz Buzz
Mumbai: Central bank buying of gold was the highest for a first quarter. Central banks added a net 290 tonne of the yellow metal to official gold reserves during Q1. In the past few years, we have seen sanctions on different countries by US and West European countries. Iran, Venezuela, and Russia are the glaring examples. These sanctions cripple the foreign exchange (FX) reserves held by them in the form of dollars.
Since dollar is the major currency used in 80 per cent of the transactions worldwide at times of sanctions, it becomes problematic for these countries to trade. So, the concept of bilateral exchange or payments getting routed through third-party countries’ line UAE, China started gaining momentum.
But these were not successful as when we made payments of oil to Russia in rupee, Rs40,000 crore got accumulated in the Russian vostro accounts, which did not have any buyer.
Talking to Bizz Buzz, Joseph Thomas, Head Research Emkay Wealth Management, said, “the quantum of central bank buying in the last two calendar years, 2022 and 2023, has been the same. In fact, 2023 was a shade lower.”
Central banks require gold as a part of their reserves, and given the fact that dollar interest rates are likely to come down, the price of gold could gradually move higher, he said, adding that whenever the Dollar depreciates there is strong potential for commodities like gold to appreciate in price terms in international markets.
Anil Kumar Bhansali, head of treasury and executive director, Finrex Treasury Advisors, says: “Other currencies like Yuan were not so liquid, and therefore, payments made in them became costly for the importer.”
The central banks then thought of Gold as one of the ways to make such payments and therefore started to building Gold and increase their gold holdings and decrease dollar holdings. Countries like China and India have just 4.33 per cent and 8.54 per cent of their FX reserves in Gold and there is a good scope of them increasing them, he said.
PBOC and Poland were the biggest accumulators of gold, and in 2022 and 2023, central banks have accumulated over 1000 tonnes each year. Ranking 9th India holds almost 812.3 tonnes of gold. The gold reserves of RBI have increased by over 50 per cent in last 6 years. It had purchased 200 tonnes from IMF in 2009.
