All that glitters is...in great demand
Sun Aug 18 2024
Central banks,
led by the People's Bank of China, have been buying gold
at unprecedented rates following the Russia-Ukraine war in order to
de-dollarise their foreign exchange reserves. The purchases were spurred by
Western sanctions on Russia that stranded half its reserves and effectively
pushed bullion's share of accessible reserves much higher than the 20%
holdings. China, in contrast, has less than 5% of its $3.2 tn reserves, the
world's largest, in gold and is taking a cautionary approach over weaponising
of the dollar. Its appetite for official dollar purchases is fed by
its strategic relations with the US, which are unlikely to improve. This places
the international gold market in a structural bull run even during phases, such
as now, when the Chinese central bank has cut back on purchases possibly
because of record bullion prices.
The rest of the emerging economy pack, including India, is also piling into
gold, with purchases in 2022 and 2023 among the highest on record. Emerging
economies tend to hold relatively larger forex reserves and their gold
holdings, relatively and absolutely, are lower than those of advanced
economies. This again is contributing to structural change in the bullion
market. Central banks will, however, have to tailor their demand to the broader
market. Retail demand for gold is also being propped up by an oversized US
fiscal deficit. The trigger for gold to cross $2,500 per troy ounce in August
is the imminent interest rate cut by the US Federal Reserve.
Politics is driving gold prices as global inflation cools after the pandemic
monetary expansion. Lingering economic factors such as the US deficit and
China's property bust are also making gold more appealing as a safe-haven
investment. India saw a decline in jewellery demand last year, but investment
demand was up. Yet, India's gold imports climbed 30% in 2023-24, but have
tapered off in the first quarter of this financial year as more of the
jewellery demand is met from recycled gold.
Source: https://economictimes.indiatimes.com/