Gold's rise as central banks' reserves

The precious yellow metal, gold, has caught the imagination of investors, particularly of the central banks of emerging markets and developing economies (EMDEs). Global economic uncertainties caused by persistent inflation and recession in the advanced economies, which were further exacerbated by the Covid-19 pandemic in 2020, war in Ukraine since 2022 and now in Gaza, have prompted many investors including central banks in the EMDEs to buy large amounts of gold as reserve and a hedge against currency depreciation. Though held in low esteem by world's great businessmen like Warren Buffet as an investible asset and dismissed by the famous British economist John Maynard Keynes as a 'barbarous relic', gold, a legacy asset, has not yet lost its shine as a safe haven for investors. Despite the pros and cons, gold seems to be returning to the world stage with its full ancient glory.
The Chinese central bank, the People's Bank of China (PBC), for instance, has over the last 17 months gone on a gold buying spree. At the same time, the price of gold has also been rising reaching a peak of over USD 2,400 per ounce in mid-April this year, though later it dropped to around USD2,300 in recent weeks. This is happening despite the fact that US dollar is going strong and investment in US Treasury Bond is bringing good returns. Then why is this rising demand for gold in the world market as an investible asset? Many analysts think, it is because of the fear of future uncertainties in the global economy. Also, the EMDEs are clearly trying to move away from US dollar as chief hard reserve currency as the US and its G-7 allies are increasingly using USD as a sanction weapon against countries that they want to punish. Russia and Iran are examples against whom sanctions have been imposed multiple times. Worse yet, recently, the G-7 countries led by the US have blocked Russian sovereign assets worth US$300 billion sitting in the banks of the US and its western allies and prohibited transactions with Russia's central bank as well as its finance ministry. Last month, the US Congress passed what it called the REPO ACT, by the exercise of which the US will be able to unlock frozen Russian sovereign assets kept in US banks and use those for Ukraine's reconstruction work. Notably, between US$ 100 billion and US$120 billion Iranian assets are lying frozen in foreign accounts in the West. Fearing similar use of USD as a weapon in the future, other countries are switching to gold as reserve. According to the World Gold Council, in 2023, People's Bank of China (PBC), alone bought 225 metric tonnes (MTs) of gold, which is about a quarter of what all other central banks of the world bought amounting to 1027 tonnes. The present stock of gold in PBC is 2,262 tonnes. The Reserve Bank of India (RBI) has also been buying gold since 2017. Meanwhile, RBI has built a stockpile of over 200 MTs of gold.
During the first three months of this year, the central banks of the world have bought 290 MTs of gold. During this period, the Turkish central bank, for instance, bought 30 MTs of gold, though last year (2023), this country was a net seller of gold disposing of 160 MTs of gold in the spring of that year. All these developments point to a clear shift from US dollar as a global reserve currency. According to a report, central banks of the world had 71 per cent of their investments in US Treasury Bonds (T-bonds).These are fixed rate US government debt securities with a maturity of 20 to 30 year. Even so, by 2020, the amount of reserves held in US T-bonds by central banks worldwide came down to 59 per cent. Interestingly, China has been reducing its greenback holdings and since 2011, those have fallen by about one third to around US$ 800 billion. The BRICS (Brazil, Russia, India, China and South Africa) countries, which are set to diminish USD's supremacy as the global reserve currency, have as part of diversifying their reserve assets, been buying gold. Additionally, they are thinking of introducing a shared currency, posing a big challenge to USD's dominance.
Against this backdrop, experts at the World Gold Council have recently said that the world's central banks' move to diversify their reserve assets to gold is not going to stop anytime soon. True, gold's worth lies in the fact that it has an intrinsic value and that it is rare and not easy to extract. But as its supply is limited, it cannot replace the world's fiat currencies like USD as a reserve currency.
While central banks of the EMDEs and others are stockpiling the precious metal as reserve asset, it does not mean that they will amass all the gold the world has. That is because the US-led Western world still holds the highest amount of gold. At present, the world's central banks together possess 35,000 metric tonnes (MTs) of gold. This is 20 per cent of all the gold that humanity has so far extracted from the mines. Almost a quarter (23.14 per cent) or 8,100 MTs is owned by the US making it 78 per cent of its total foreign reserve, followed by Germany (3,300 MTs), which is 74 per cent of its forex reserve. In comparison, gold represents only 22 per cent of Russian forex reserve, while, gold still makes a mere 4.0 per cent of China's foreign exchange reserve.
Yet recent spike in gold price may not be entirely ascribable to gold purchase by world's central banks. Analysts find it as the wok of speculators.

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