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Stocking up of Gold by Central Banks

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November 11, 2022

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.

goldreserves

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.

What are the other findings of the report?

  • 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.

Quick facts

The World Gold Council

  • The World Gold Council was formed in 1987 by some of the world’s most forward-thinking mining companies.
  • There are three core pillars to their mission in serving the gold market and its participants.
    1. Improving understanding
    2. Improving access
    3. Improving trust

 

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
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