Hedging strategy. Aggressive gold buying by central banks point to impending global recession

The aggressive buying of gold by central banks across countries points to the impending global recession and their intention to diversify from the dollar, which has been strengthening against every other currency.

As per the latest World Gold Council report, global central banks purchased 400 tonnes of gold in the September quarter, the most since 2000 and almost double the previous record of 241 tonnes in the September quarter of 2018.

Buying spree

The gold buying spree of central banks lifts the year-to-date gold purchases to 673 tonnes, higher than any other full-year total since 1967.

While the Reserve Bank of India kept its date for buying gold in the September quarter, most of the other emerging countries also joined the bandwagon.

The RBI purchased 17 tonnes of gold last quarter, bringing total gold reserves to 785 tonnes. Turkey remained the largest gold buyer this year and added 31 tonnes in Q3 and 95 tonnes of gold year to date taking its gold reserve to 489 tonnes.

The other central banks that further gold-plated their reserves include Uzbekistan, Qatar, Kazakhstan, Turkey, Mozambique, the Philippines, and Mongolia.

Slipping into recession

Ajay Kumar, Director, Kedia Stocks Commodities, said the shifting of dollar reserves into gold by central banks is a clear indication of the global economy slipping into recession early next year with aggressive bank rate hikes by every other country to fight inflation.

With the dollar strengthening against almost all currencies, most countries want to diversify their reserves away from the dollar, and gold is considered a safe haven, he said.

The common thread running between countries mopping up gold is the depreciating currency. While the rupee has depreciated the least at 6 per cent so far this year against the dollar, Turkey’s lira has slumped 52 per cent through September, and the Egyptian pound fell by 20 per cent.

Prof. Arvind Sahay, Chairperson, the India Gold Policy Center (Indian Institute of Management-Ahmedabad), said the global financial system may see a reordering in the coming years with the dollar becoming less stable.

The transition creates uncertainty, and gold remains a natural hedge in uncertain times, he said.

Between 1973 and 2008, central banks sold gold because they believed that there was a “stable” rules-based global financial system, but the global financial crisis shook confidence, followed by the rise of China, and the current Ukraine war has created even more uncertainty, he added.