This week started on a sweet note of love. The colour red took over the Monday blues when we celebrated Valentine’s day with our loved ones.

In the Indian setting, no one can deny the love for gold. Buying gold is a tradition for Indians that never seems to fade. At least a little bit of the yellow metal can be found in almost every Indian portfolio in physical or paper form.

This love for gold is not only for the aam aadmi, but our central banks seem to be captivated by the charm of this yellow metal. RBI is the 2nd largest buyer globally. RBI mopped up 77.5 metric tons of gold in 2021, its second highest ever after 2009 when it bought 200 metric tons from the International Monetary Fund. Falling gold prices have contributed to this shopping spree.

In times of uncertainty, the price of gold moves north. Since 2021, the economic turmoil is settling down, and the economic growth is picking up, leading to a consistent price decline of gold in 2021.

In 2022, as we expect an inflationary period, RBI aims to increase its gold reserves, balancing out the weakening in major currencies, including the U.S. dollar. This weakness in the prices has a detrimental impact on the current account balance of a commodity-importing nation like India, which can be countered by raising gold reserves.

The next logical question would be – Is RBI alone in this? Interestingly, the answer is NO.

All central banks like to keep a fraction of their reserves as gold, as it acts as a hedge during uncertain times, like the ones we are witnessing at present.

According to the Goldhub report published in January, Central banks across the world collectively bought 463 tonnes of gold in 2021, a significant rebound in demand from central banks following the decade low of 255 metric tonnes in 2020. 2021 was the twelfth successive year of net purchases.

In 2021, The Central Bank of Thailand topped the buyer’s list with 90 tonnes. Hungary tripled its gold reserves by buying 63 tonnes over the year. Brazil bought 62 tonnes, while Uzbekistan and Kazakhstan added 30 tonnes and 15 tonnes.

The primary reasons why central banks like gold is because of liquidity, intrinsic value, and lack of credit risk. Gold has seen strong support from the consumer and central bank demand and its performance this year indeed underscored the value of its unique dual nature and the diverse demand drivers. The tug of war between persistent inflation and rising rates created a mixed picture for demand on the investment side.

The chart below depicts the movement in the average price of gold (per 10 gm). Though gold is a great hedge against inflation and is recommended for partial diversification in the portfolio, the returns underperform substantially as compared to equities.

All major central banks have parked a substantial amount of their foreign currency reserves in gold. In the current global economic environment where most economies are facing unprecedented inflation, the pandemic abatement is uncertain, you may feel the urge to add gold in the portfolio at appropriate times.

It need not be physical gold or jewellery for your loved ones, with the option of sovereign gold bonds and digital gold being now available, you may start investing in smaller amounts as well without worrying about any physical storage. Sovereign gold bonds seem to be best option as a fixed 2.5% coupon is also assured.

However, since the returns are way lower as compared to equities, do not binge on the bling! Though a ‘valuable’ addition to your portfolio, add in small proportions, may be, while keep a major part tilted towards equities for long run returns!

Best Regards

 
Dr. Tarunika Jain Agarwal Ph.D.

Alpha Research