Here’s Why You Should Be Stacking Up Gold as Central Banks Do…
Aug 01, 2019

Author: Rounaq Neroy

(Image source: hamiltonleen on

The World Gold Council (WGC) data reveals that central banks across the world are chasing gold, particularly, the banks in the developed economies. Even developing ones such as Russia, China, and India are accumulating gold.

In the financial year 2019-20, the Reserve Bank of India (RBI) purchased 52.3 tonnes of gold to supplement its foreign exchange reserves, thus making India's entry into the list of top-10 countries holding significant gold reserves. Currently, India holds 6.6% (or 618 tonnes) of its overall foreign exchange reserves as gold.

Graph 1: How are the top-10 countries stacking up gold

How are the top-10 countries stacking up gold
International Financial Statistic data of the IMF are two months in arrears, so holdings are as of June 2019 for most countries, May 2019 or earlier for late reporters.
*The percentage share held in gold of total foreign reserves, as calculated by the World Gold Council.
(Source: World Gold Council)

In Q2 2019, the net purchases of central banks summed 224.4 tonnes (t), a 47% increases year-on-year. And as a result total net purchases by the central banks in the first six months of the calendar year 2019 rose to 374.1t, reporting a 57% increase year-on-year. In addition, according to WGC, the demand on a year-to-date basis was the highest level since central banks became net purchasers (on an annual basis) in 2010.

Global Gold ETFs too have reported encouraging inflows...

While demand for physical gold in India (particularly from bars, coins and jewellery) is up, globally, investors are adding gold in paper form via ETFs.

The WGC data shows that holdings in global gold-backed ETFs rose sharply by 127t in June 2019 to 2,548t --a six-year high. Global assets under management (AUM) of gold ETFs in US dollars rose 15% to US$115bn, the largest monthly increase since April 2013, as all regions experienced inflow mainly led by European and North American funds.

So, what's turning the spotlight on gold?

Gold has always occupied an important position in the central bank's reserve management. However, of late, here are few factors triggering purchases:

  • Trade war tensions between the US and the other economies

  • A slowdown in global trade growth (lowest since the last ten years)

  • Subdued global economic growth (slowest pace in the last three years)

  • Frail investment growth (particularly in advanced economies)

  • Upside risk to retail inflation

  • Pause in rate hikes by the US Federal Reserve

  • The ECB open to fresh stimulus measures

  • Delay in Brexit, drop in the value of Pound, and the leadership battle that followed after Theresa May's resignation

  • Geopolitical tensions

  • And of course the rise in gold prices

The precious yellow metal is looked upon as an important strategic asset class, and central banks aren't taking any chances. Diversification and a desire for safe, liquid assets are the main drivers of buying, states the WGC.

Even the International Monetary Fund or IMF Global Financial Stability report highlights an increase in the level of risk among multiple global metrics and therefore implied the importance of owning gold in one's portfolio. The IMF is one of the largest official gold holders, with currently 90.5 million ounces (2,814.0 tonnes) of gold at designated depositories.

Should you buy gold?

The straight answer to it is 'Yes'; but in my view, approach gold strategically.

The following factors will prove supportive for gold:

  • Easy monetary policy stance adopted by the US Federal Reserve, plus a possible rate cut, and a potential fresh round of stimulus by ECB. Bank of Japan, too, has promised to ease rates if needed.

  • Trade war tensions loom between the US and the other economies

  • Geopolitical tensions

  • Subdued economic growth in many parts of the world, juxtaposed with the volatility in the equity market has increased

  • The global debt-to-GDP is near a record high at US$ 243.2 trillion (more than thrice the size of the global economy, according to the Institute of International Finance)

  • Potential upside risk to retail inflation

Even the WGC in its mid-year 2019 outlook, titled "Heightened risk meets easy money" has stated that the following:

Financial market uncertainty and accommodative monetary policy will likely support gold investment demand

Price momentum and positioning may fuel rallies and create pullbacks, as investors continuously reassess their expectations based on new information

Weaker economic growth may soften gold consumer demand near term, but structural economic reforms in India and China will likely support long-term demand.

Watch this video: Can Gold Make Money with the World Sleepwalking into a Global Crisis

Speaking specifically of India (the second-largest consumer of gold), gold demand will be hinged on the progress of southwest monsoon. This is because; nearly two-thirds of India's gold demand comes from rural areas, which depend on agriculture as a source of livelihood.

Currently, elevated gold prices and Modi 2.0's full budget increasing customs duty on gold imports to 12.5% (from earlier 10.0%) are deterrents. That being said, the upcoming festive season and wedding muhurats could boost gold demand, and in turn, push prices per 10 gram of gold further up from Rs 34,000 levels at present.

WGC has projected India's gold consumption in 2019 in the range of 750-850 tonnes versus 760.4 tonnes last year.

How to approach gold?

Allocating at least 5-10% of your entire investment portfolio to gold and holding it with a long-term investment horizon, will prove to be sensible and a smart investment strategy.

But buy gold the smart way --in a paper form, particularly for investment purpose.

[Read: 4 Smart Ways to Invest in Gold]

[Also read: Here's Why You Should Allocate Some Portion to Gold ETFs In 2019]

With uncertainty looming in many parts of the world and the headwinds in play, the precious yellow metal would play its role of an important asset class in your portfolio.

Gold has historically served as an effective portfolio diversifier, safe haven, a store of value during economic uncertainty, and a shield against inflation in the long run.

Graph 2: Gold displays its lustre in the long run

Gold's displays its lustre in the long run
Data as on July 31, 2019
(Source: ACE MF)

​The long-term secular uptrend gold exhibits, is something that invites attention and highlights the importance of owning gold in the portfolio with a longer investment horizon.

Happy Investing!

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