Between 2010-19 total gold purchased by
central banks was 3,560.28 tonnes.
During the past decade many central
banks have shored up their gold reserves. This is in contrast to the previous
decade when many central banks were cutting back on gold. So is something
happening? Central banks' love for the yellow metal has in turn made gold
speculators in Dubai quite bullish.
*Disclaimer: The
objective of this column is not to recommend gold as an asset, but to point out
the ripple effect central bank gold purchases have caused.
Between 2010-19 total gold
purchased by central banks was 3,560.28 tonnes. The only exception was Germany
which sold 37 tonnes. The top 18 gold owning central banks accounted for
purchases of 2,628 tonnes. The biggest among them was Russia, followed by
China. India too purchased 50.94 tonnes
They point to
the increasing role of non-dollar trades. While it is difficult to put a finger
on the exact role each currency plays in world trade – some of the trades have
in-built political give-and-takes structured as part of such deals – a good
indication can be found from figures released by
Currency Composition of Official Foreign Exchange Reserves (COFER),
International Financial Statistics (IFS).
The numbers show that just euro
and renminbi trade swelled from 17.51 percent of total global foreign exchange
reserves to 21.21 percent during just seven quarters from Q2 2017 to Q4 2018.
But when allocated reserves (which are around 83-94 percent of total forex
reserves) are taken into account, the share of the Euro and Renminbi soars even
further.
Their share climbed from
21.03 percent to 22.58 percent during the same period. This is without
considering the yen or the pound sterling, because they are unlikely to become
global currencies. Clearly, the US dollar is losing its clout in global trade
in a growing market.
With neither the euro nor the
renminbi yet ready to assume the mantle of becoming a global currency, many
banks prefer reducing their exposure to the US dollar, and have begun focusing
more on gold which is relatively neutral when it comes to geographic loyalties.
However, the US, a major gold owning country, chose not to purchase gold during
the past decade. It would appear that it did not want to give more weight to
gold at the cost of its own global supremacy. Germany, another major gold
owning country sold 37 tonnes of gold. But that could be explained away because
Germany already has too much of gold in its reserves.
In fact, both the US and
Germany – both economic powerhouses in the global economy – have tremendous
(though unstated) confidence in gold. This yellow metal already accounts for as
much as 70.6 percent share in Germany’s forex reserves. In the case of the US,
it is even higher, at 74.9 percent. India’s holdings in gold stand at just 6.4
percent of its reserves. This low figure points to an urgent need for India to
revise its gold policies and start building its gold reserves without resorting
to global purchases. One way would be to liberalise gold
mining policies.
Another way would be to introduce better
versions of gold bonds. After all, various estimates put India’s gold holdings
(in private hands) at 20,000 tonnes to 25,000 tonnes, the largest in the world.
Expect both Russia and China
to start scaling the list of top gold holders given their aggressive purchases
during the past decade. Russia has an added advantage. It is believed to have
the highest reserves of (as yet unmined) gold in the world.
Also expect, the US dollar to
continue losing its share in global commerce because of three reasons. First is
obviously the emerging economic heft of China. Second is the stupid moves the
US has itself made, explained a bit later. A third reason could be the
declining relevance of oil, thanks to solar and other renewable sources of
energy. It is always worth remembering that the US is a major player in oil
markets as well, both directly as well as through its various oil companies.
That the US has made unwise
moves can be seen from the manner in which it tried to sanction oil exports
from Russia to Europe. That move made Russia swiftly clinch an oil and gas
trade deal with China and build an oil pipeline to this dragon country. That,
in turn reduced China’s vulnerability to both Middle East and US based energy
markets, and caused a substantial amount of trade to move away from US dollars.
A similar situation is
happening with Iran as well. Trying to impose (unilateral) sanctions against
Iranian oil, will replay a similar scenario. It will push Iran to sell more oil
to China, which always needs increasing amounts of energy as it grows in
industrial strength. That will reduce the share of US dollar denominated trade
further.
It won’t be long before India
too might have to move this way, if it wants to bridge the growing trade
balance with China which has already emerged as its largest trading partner. As
time goes by, trade between India and China is bound to grow – partly on
account of geographical proximity, much in the same way US-Canada trade ties
have swelled over the past several decades, and partly because of business
negotiations.
India’s defence deals with
Russia are also likely to reduce dollar denominated trade, and this scenario
could get replicated in several ways around the globe. China’s predominance in
the telecom sector – remember 5G – could further accelerate the move
away from the US dollar. That could also explain the ire of the US over China’s
Belt and Road Initiative (BRI) which again gets into non-dollar deals.
As the dollar loses market
share, expect turbulence in currency markets to increase. That will push more
central banks towards gold. Will this mean a gold rush? That is hard to say
because gold prices are also a result of hedging and de-hedging strategies
adopted by gold mining companies.
But one thing is certain.
Gold is becoming more relevant to central banks than a decade ago. The lust for
gold will thus remain undiminished.
Source: https:// www.moneycontrol.com/news/business/opinion-the-increasing-relevance-of-gold-3915741.html
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