World Gold Council expects RBI's demand for gold to remain buoyant

Globally, more and more central banks are buying gold for their forex reserves and according to WGC, RBI has been the fourth largest buyer of gold since the start of 2017

The World Gold Council has said the Reserve Bank of India (RBI) has, since the start of 2017, been the fourth largest buyer of gold for adding to foreign exchange reserves. Russia, Turkey and Kazakhstan are the top three.

Top 10 gold buyers since 2017

Globally, more and more central banks are buying gold for their forex reserves. In recent years, more central banks have entered the gold market. International Monetary Fund (IMF) data reveal Egypt recently bought gold for the first time since 1978. India, Indonesia, Thailand and Philippines re-entered the market after a multi-year absence.

Top 12 gold holdings by central banks

Demand from central banks

According to the IMF, at the end of the first half of calendar year 2018, central banks collectively owned $1.36 trillion of gold, around 10 per cent of global FX reserves. They accounted for 10 per cent of global demand in those six months.

Why central banks buy gold

Around a decade ago, central banks preferred to add the euro to their diversified reserve. Preference now seems to be changing towards gold. The euro has not been able to challenge gold as expected– rather, it has weakened significantly in past 10-12 years.
 

A need for portfolio diversification to reduce dollar dependence, especially after the Trump regime took charge, has been increasingly felt by global central banks. Gold is emerging as a better option.

Why RBI is buying gold

There is no official word but a prominent theory is that the government having sold sovereign gold bonds worth 23.5 tonnes, the redemption price risk needs to be hedged. Which is why RBI might be buying equivalent gold for its reserves. Diversification of the forex composition could be another reason, like other central banks.

Outlook for future

The World Gold Council expects central bank demand for gold to remain buoyant. Diversification will continue to be an important driver of demand, as will the transition to a multipolar currency reserve system over the coming years. Gold is preferred due to its time-tested reliability, universal acceptance and deep market.