The decade gone by began with gold holdings by central banks eking out a gradual dip until the global downturn prompted a turnaround. After years of steady net selling by central banks, the start of 2009 saw the group turning net buyers of the yellow metal, a trend that has carried into the years following.
According to data put out by the World Gold Council (WGC), gold held by central banks as a proportion of total reserves was 12.8 per cent at the end of March 12. That’s a good step up from the 9.7 per cent holding at the end of 2008. Twelve countries now have more than half their foreign reserves in gold, against seven at the end of 2008. The WGC, in fact, recently added official purchases by nations’ central banks and unions such as the IMF, ECB, and so on, as a new element of gold demand. The elements hitherto were only jewellery, technology and investment.
Gold is considered an important reserves asset, given that it is the one asset which can be internationally accepted as money, even when a nation is facing economic difficulties. The newly emerging nations are primarily the ones shoring up their gold holdings, while developed countries, already sitting on piles of the metal, have so far restrained from adding heavily to that pile.
Prices of the precious metal too have risen sharply, up 91 per cent, as a result of the rollercoaster ride the global economy has taken in the past four years.
Rising holdings
At the start of 2002, gold held by the central banks of all countries amounted to 29,378 tonnes. This holding eroded by 2,750 tonnes over the next six years before uncertainties gripped the world economy and turned the spotlight on gold in late 2008. From then on, economies net added 1,380 tonnes to their gold holdings.
The investor community began flocking to the haven of the precious metal due to turbulent equity markets. The crippled world economy led to higher risks attached to assets such as currencies and bonds, and countries snapped up gold as a measure of prudent reserve asset management.
A few countries had been steadily reducing their gold stockpile prior to the downturn.
Then they turned tail and built it up in the years since. For instance, the Philippines had net reduced gold by 95 tonnes between 2002 and 2008. It quickly began buying up gold, with 40 tonnes added to the March 12 quarter. As a percentage of total forex reserves, gold is back to the 13 per cent levels seen in the early part of the decade.
Similarly, gold held by Venezuela picked up by 46 tonnes between 2009 and March 2012 after shrinking by 10 tonnes before that. Other countries to turn into purchasers include Belarus, Slovakia, Ecuador and Turkey.
Emerging plays
Most buying has come from Asian and other emerging economies which have held far lower proportions of gold than their developed counterparts.
Their growing foreign exchange reserves have prompted them into diversifying holdings away from riskier dollars and euro currency holdings as the recession took hold.
Most advanced economies, such as France, Germany and the US have well above 50 per cent in gold holdings for the past several years. France, despite selling off almost 600 tonnes from 2002 to now, still has 73 per cent held in gold as of March ‘12. In contrast, developing Asian economies such as Thailand, Russia, Mexico, India and Malaysia held, on an average, less than 5 per cent of forex reserves in gold before the slowdown.
These countries and other emerging economies sought to shore up gold holdings. Russia bought almost 400 tonnes and pushed up percentage of gold reserves to 9 per cent by March 2012. India picked up 200 tonnes in one go in the last quarter of 2009, pushing gold to 557 tonnes, which level it has maintained since then. India’s gold reserve stood at 10 per cent of total forex reserves in March 2012.
Recent buying
Emerging economies that followed a strategy of purchasing gold managed to push holding in total reserves by more than three percentage points in most cases. But some, such as China and Brazil, still hold a small proportion of gold in reserves, at less than 2 per cent.
Maximum gold addition was seen in calendar 2011 , with an overall purchase of 456 tonnes. The trend is still buoyant and does not show signs of letting up, with the March 212 quarter seeing 81 tonnes being bought.
Among those consistently buying of late is Kazakhstan, which is reportedly aiming at a 20 per cent share of gold in forex reserves. Holding now is at about 16 per cent. Turkey, Mexico, Russia, Argentina and the Philippines are other larger buyers. There are also a handful of smaller buyers such as Ukraine and Tajikistan.
With the turbulence in the world economy still very real, the trend of central bank buying may well continue for a few quarters yet. Countries such as China, Kazakhstan and Russia also buy the gold produced in their own countries, resulting in lesser global supply.
acharya@thehindu.co.in