Home / Markets / Mark To Market /  Gold is shining once again as central bankers go on a buying spree

Gold has lately been in the spotlight. And how! Its price has risen 11% from the lows of end-September. Central banks across the globe have been buying larger quantities of the precious metal, a phenomenon not been seen since 1971. They added 651.5 tonnes to their treasure chests in 2018, a 74% increase over the previous year, according to a World Gold Council (WGC) report.

Emerging markets (EMs) such as Russia, Turkey, Kazakhstan and Poland have been big buyers of gold last year, according to the WGC report.

So, what gives? The ongoing trade war between the US and China has heightened global uncertainty. Hence, gold becomes a useful hedge for most countries. Globally, gold prices move inversely compared to the US economy and the dollar. Gold then becomes useful as a safe-haven contra strategy.

Besides, EM countries are expanding their balance sheets to include other assets. After US Treasuries, gold stands best placed for diversification, say analysts. It is reasonably liquid and a global store of value.

“Central bankers are attracted to gold because no one knows how the ongoing trade disputes will be resolved; nor how Brexit will turn out. If the trade disputes get out of hand, and if there’s stress in the global economy, naturally, the dollar will appreciate. Conversely, emerging market currencies could be at risk. So, anyone would like to hold gold against currency volatility, including central banks," says Vikram Dhawan, head (commodities) at Reliance Nippon Life Asset Management Ltd.

Second, global trade wars are giving rise to another phenomenon—countries are increasingly resorting to trading among themselves through bilateral agreements. As a result, the dollar trade is now shifting to bilateral currency-based trades. This reduces the need for countries to hold dollar reserves.

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Chirag Mehta, senior fund manager (alternative investments) at Quantum Asset Management Co. Pvt. Ltd, says, “Much of the globe is starting to move away from the dollar. So, for most countries, it does not help to hold more dollars if the trade is not being routed through dollars."

Besides, since EM currencies fell against the dollar last year, these economies particularly benefited from holding gold. “If you were holding gold in Turkey or Argentina last year or Brazil and Russia, and even India, you would have obtained fantastic returns in local currency terms. So, I would say that gold is in a bit of a sweet spot as far as central banks are concerned," notes Dhawan.

For example, as the chart alongside shows, in Argentina, gold prices doubled last year in local currency terms. In India, the rupee’s slower fall has meant that gold managed a modest 7.48% return last year.

Analysts reckon that gold could consolidate now, but with stress points across the global economy, the yellow metal will not lose its sheen.

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