Stocking up of Gold by Central Banks

Why in news?

According to the World Gold Council (WGC), the demand for gold has risen by 28% this year.

What is the trend about?

• Gold has always been a critical component of a country’s reserves.
• Central banks bought 399.3 tonnes of the yellow metal compared to 90.6 tonnes in the same quarter of 2021.
• The Reserve Bank of India (RBI) was the third largest buyers in Q3 of 2022.

Reasons for stocking up of gold by Central Banks

• Economic uncertainty and reserves rebalancing seem to be the prominent reasons.
• Safety factor - Historical position was the top reason cited by central banks to buy gold.
• During a crisis, gold acts as a tool to hedge against inflation and has no risk of default.
• Gold’s durability, scarcity and finite supply are some features that provide central banks with surety and trust during times of uncertainty.
• Dollar rebalancing - Since the dollar has rallied significantly, the weight of it in the overall reserves would have gone up.
• The dollar index has appreciated 16% in October 2022.
• Therefore, central banks might want to add gold to rebalance their reserves to their preferred strategic level.

What is the case with India?

• RBI was the third largest among the known buyers in Q3 of 2022 as it added 17.5 tonnes to the reserves.
• RBI is also the largest buyer since the pandemic.
• The central bank hold gold both domestically and in other countries.
• According to the WGC, gold as a percentage of the RBI’s total reserves stood at nearly 8% at September end.
• Reasons for stockpiling gold
  • Fluctuation in the rupee-dollar exchange rate
  • Trade deficit concerns
  • Geopolitical uncertainties
  • Diversification of assets

India owns 781 tons of gold, ranking it as the 9th largest gold-holding country in the world.

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• Outlook - Jewellery demand led by India and China also saw a surge in Q3.
• But, the average price of gold was down 3% year on year in Q3.
• Price down - Significant outflows from global gold ETFs (Exchange Traded Funds) have weakened the price.

References

1. The Hindu Businessline│ Central banks stock up on gold
2. Schiff gold│ Central Banks Continue to Have an Appetite for Gold
3. Moneycontrol│ What’s the reason for recent gold rush among central banks
4. World Gold Council│About the World Gold Council