The Hindu Business Line : Will more central banks buy gold as reserve asset?

The humungous reserves run the risk of currency market volatility potentially eroding the dollar value of the reserves. It makes commercial sense for the country to diversify at least a small part of its reserves into a more solid asset such as gold.

G. Chandrashekhar

Mumbai, May 13

Report of China buying gold from domestic sources over the last six years may actually have more significance than meets the eye.

Purchases made by the Chinese State Administration for Foreign Exchange (SAFE) have been made over to the country’s central bank, the Peoples’ Bank of China (PBoC).

With the addition of the said gold to the monetary reserves held by the central bank, it is clear, the Chinese government is increasing is official monetary gold reserves. Today, China’s central bank has the sixth largest gold holdings.

According to the CPM Group, the way in which gold was purchased and then transferred to the PBoC is important.

It has been clear that the Chinese government leaders were interested in buying gold over the past several years; but there as a great deal of internal discussion as to whether such gold should be added to the monetary reserves held by the central bank, or as investment stocks to be held by China Investment Corporation or other non-monetary Chinese government entities.

Monetary reserves

That gold has now been added to the monetary reserves is important because it indicates the extent to which gold is being rehabilitated as a monetary reserve asset, not only by the Chinese monetary authorities but also by central bankers around the world, CPM group pointed out.

With rising investment demand over the past nine years, it was clear that gold was being restored as a more important part of the of the world’s financial system.

The Chinese government’s decision to say that this gold belongs in its monetary reserves emphasises that monetary authorities are also looking at gold with greater interest than they have since the 1960s, CPM group argued.

Currently, China’s foreign exchange reserves are about $1.9 trillion.

The humungous reserves run the risk of currency market volatility potentially eroding the dollar value of the reserves.

It makes commercial sense for the country to diversify at least a small part of its reserves into a more solid asset such as gold.

China buying

Although there has been official conformation of gold being transferred to the monetary reserves of China’s central bank only now, the market had heard many times in recent years about Chinese buying. However, no one was sure about the status of the asset purchased and the source of such purchase.

Several news reports had in the past talked of China’s central bank buying gold. The correct picture has emerged now. Whether more such purchases are in the offing, time will tell.

It is possible that other countries with large dollar reserves may also be harbouring thoughts similar to that of China. If other central banks also begin to view the yellow metal as an important monetary asset, there could be change of sentiment for the gold market which has been languishing at around $900 an ounce of late.

For a market that is already feeling the pinch of slowing physical sales, purchases for sake of diversifying reserve assets in addition to return of investor interest should prove positive.

IMF stocks

At the same time, there are talks of the International Monetary Fund wanting to liquidate gold in its possession. Among central banks, the IMF has the third largest holding of gold.

The IMF sales as and when done are sure to augment physical supplies and depress prices.

Another big question is about European central bank sales of gold.

The agreement to sell 2,500 tonnes of gold (500 tonnes a year) over a five-year period will come to an end by September this year. Whether it will be extended and for what period, as also whether the quantum of sales will be modified are questions everyone is asking.

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