In a sign that central banks across the globe could be seeing gold as the new dollar, their purchases of the metal amounted to a staggering 15 per cent of gold sold worldwide in 2018. According to Gold Demand Trend 2018, released by the World Gold Council on Thursday, January 31, net purchases by central banks (as a part of foreign currency reserves) reached 651.5 tonnes in 2018, up 74 per cent from previous year. Of this 168 tonnes were added in the December quarter, representing a 126 per cent surge year-on-year.
This is the highest level of annual net purchases since the suspension of dollar convertibility into gold in 1971.
Institutions and other classes of investors had been buying the US dollar for over a year as they regarded it as the highest yielding among safe assets. However, central banks, which foresee futures, have been increasingly looking at buying gold. Till 1971, the US dollar was convertible to gold under the Bretton Woods system in currency markets. The highest ever quantity of gold purchased by central banks was seen in 1967 when central bank gold reserves rose by 1,404 tonnes as the dollar was weakening the past few years.
What central banks say
WGC says, “Despite the passing of a decade since the global financial crisis, times seem no less uncertain. Central banks have reacted to rising macroeconomic and geopolitical pressures by bolstering their gold reserves.” The Council says the trend of central banks buying more gold for adding to reserves, to de-dollarise (reduce dependency on dollar) or diversify reserves will continue.
In the survey, 76 per cent central banks view gold’s role as a safe haven asset as highly relevant, while 59 per cent cited its effectiveness as a portfolio diversifier. And almost a fifth of central banks signalled their intention to increase gold purchases over the next 12 months.
The big buyers
Russia is among largest buyer, adding 1,726 tonnes during the past 13 years as part of a move to de-dollarise reserves. It bought 274 tonnes in 2018. The Central Bank of Turkey increased gold reserves by 51.5 tonnes in 2018, while Kazakhstan added 50 tonnes. RBI is not far behind, having added around 40 tonnes, taking its gold holding at 598 tonnes. Interestingly European central banks have been selling gold and have decided to reduce it, in a sign that seems to indicate a change of track in the continent. WGC maintains that European central banks also bought gold last year, led by Hungary. That country's central bank cited gold’s role as a hedge against future structural changes in the international financial system, as well as its lack of counterparty or credit risk, as reasons for the purchase.
What was past system?
The Bretton Woods system which was prevailing till 1971, collapsed when US President Richard Nixon severed the link between the dollar and gold — a decision made to prevent a run on Fort Knox or the US Bullion Depository, which contained only a third of the gold bullion necessary to cover the amount of dollars in foreign hands.
Soon after, globally central banks added gold to their reserves as a diversification. The US Federal Reserve, though, still has the highest quantity of gold (8,133 tonnes making up 79 per cent of it forex reserves) among peers. Earlier, the US was maintaining gold to cover the amount of dollars in foreign hands.