The Reserve Bank of India has bought 50.4 tonnes of gold since December 2017.
This signals a new effort among many central banks to reduce dependence on the US dollar and move to gold.
What is the changing scenario with gold?
Gold prices have been stagnating around $1,260 per ounce since 2016.
Changing cultural preferences has reduced the sale of heavy gold jewellery in markets such as India.
However, the mine output has been increasing, and thus exerting further pressure on prices.
This is pushing away investment demand from exchange traded funds and buyers of gold coin and bars.
In these challenging times, gold has received support from the global central banks.
How are central banks using this?
There was purchase of 651 tonnes of gold by global central banks and other institutions in 2018.
Additions to central bank gold reserves spiked 74% last year.
This is largely why the surplus in gold reduced, helping support the prices.
RBI - There has been a long break since the last time the RBI added gold to its reserves in 2009, when 200 tonnes was bought from the IMF.
But there appears to have been a change in RBI's line of thought since 2017, from when it has joined the gold buying countries.
Particularly since March 2018, the RBI has been buying gold consistently.
With these purchases, the country’s gold reserves have risen to 606 tonnes towards the end of February 2019.
Is this an anti-American strategy?
There is a definite pattern apparent in the countries that are leading this central bank gold hunt and adding gold to their forex reserves.
Countries with a strong anti-American sentiment, that wish to reduce their dependence on the US dollar, top this list of nations.
Russia - This gold buying spree has, in fact, been led by Russia and its allies.
Russia has been steadily adding to its gold stock-pile since 2006 but the additions accelerated after 2014.
Notably, in 2014, Russia’s incursion into Ukraine flared its conflict with the US.
One-fifth of its forex reserves are now held in the form of gold.
Russian allies such as Kazakhstan, Uzbekistan, Tajikistan and Kyrgyz Republic are other nations that have been adding gold to their reserves over the last decade.
Turkey - Relations between Turkey and the US have been steadily deteriorating since 2016.
It was when Turkey demanded that the US extradite a cleric who was suspected of being involved in the failed coup in Turkey that year.
Consequently, Turkey decided to bolster its war chest by purchasing 85.9 and 51.5 tonnes of gold in 2017 and 2018, respectively.
China - China too has shown a growing liking for gold in recent years.
It has purchased 454 tonnes of gold between 2003 and 2009 and another 604 tonnes between 2009 and 2015.
As seen, all these countries are moving towards de-dollarisation and making conscious efforts to reduce their dependence on dollar.
They are reducing their investments in US government securities and trying to settle bi-lateral trade in local currencies.
What is the emerging economies' rationale?
Besides, the above countries, a few other central banks seem to have decided to add to the gold reserves since late 2017.
These particularly include the emerging economies such as Poland, Hungary and India too.
Emerging economies, including India, are nervous about future policies of the US government due to the -
trade war unleashed by the US
clear anti-globalisation stand taken by the current US government
lack of respect displayed for policies that promote peace and inclusive growth
All these have made it imperative to reduce dependence on the US currency as it can turn volatile in tandem with the U.S.'s policies.
There is also mounting debt in the US and uncontrolled printing of notes for successive quantitative easing programmes since 2009.
These too have eroded the intrinsic worth of the dollar significantly.
Moreover, for now, there is no viable alternative to dollar among the currencies of other major economies.
So this leaves gold as the only alternative avenue for global central banks that wish to divert part of their reserves away from the dollar.
What do these imply?
The recent development with gold is beneficial for those who have stashed a large portion of their savings in the form of gold.
It signals that gold retains its position as a premier store of value.
[The consumption demand for gold is slowing in countries such as India.
But it is increasing in the US, China, Hong Kong, Thailand and some countries in the Middle East.]
The central bank buying further shows that gold will continue to be a reliable diversifier and a hedge against volatility in other currencies.
So the accumulated wealth of households in the form of gold is unlikely to depreciate significantly.
However, caution must be taken as the hope that money parked in gold would grow one's wealth may not be the case at this juncture, given the price scenario.
