The top buyers of gold recently hasn’t been scared investors, but rather the central banks of the world. As markets closely follow the moves these major financial institutions make, seeing several of the world’s largest central banks jump on gold is a little perplexing.
For the average investor, it’s enough to make one consider what these entities might know that the rest of the markets don’t. India’s central bank will likely be joining Russian and Chinese central banks in purchasing large quantities of gold this year.
The reason for this doesn’t necessarily have to do with the possibility of a looming recession around the corner. The Reserve Bank of India’s (RBI) purchases can also be seen in the context of other developing economies, which are all trying to diversify and de-dollarize their foreign exchange reserves.
The RBI will likely purchase around 1.5 million ounces in 2019, or 46.7 tons according to Bloomberg. In 2018, the bank added another 42 tons to its reserve, which currently stands at a record high of almost 609 tons.
In comparison, the Russian central bank bought 274 tons in 2018 and will be increasing it’s purchases this year, while China’s central bank purchases could reach a new record in 2019 as the institution started a buying spree back in December.
Overall, global gold purchases from central banks could reach 700 tons in 2019 between these countries, while other nations like Iran, Turkey, and Kazakhstan also make their own secondary purchases.
In 2018, governments worldwide added 651.5 tons of gold last year to their reserves, the second-highest level of purchases seen in recorded history. This year could break a world record in this regard.
“There seems to be some form of pattern, not just the RBI, that central banks tend to increase gold reserves when the global macroeconomic environment is uncertain,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. “It’s no coincidence that one of the biggest buyers of gold in recent months was China, which is in the midst of trade tensions with the U.S. and may have been seeking to diversify its trillions of dollar reserves.” India may be following a similar tactic of diversification, he added.
Current macro-economic concerns undoubtedly are playing their role in this surge of gold purchases. The ongoing U.S.-China trade dispute is still going on and threatens to further disrupt global supply chains.
Back in March, President Trump announced he planned to end key trade preferences for Turkey and India and told Congress that of his “intent to terminate” benefits towards these countries.
Other factors such as the growing U.S. deficit as well as the Federal Reserve signaling a pause on possible interest rate hikes are also likely reasons the RBI is adding to its gold holdings.
The Indian rupee was also Asia’s worst-performing major currency in 2018 but has steadied itself recently due to strong foreign inflows into the markets. “This is an argument for further buying,” added Commerzbank senior commodity analyst Carsten Fritsch. “It is too speculative to say how much gold the RBI will buy this year. It could be more than last year, though.”
Gold prices ended today at $1,277.05 per ounce, a slight decline of 0.2 percent.