Even today, no currency is based on gold. But the most precious metal is still held in reserve by governments. And in the wake of the pandemic, the inflation crisis and rising interest rates, people are becoming more interested in the commodity.
Top buyers
The World Gold Council reported this in its latest report. National bankers bought 228 tonnes of the metal in the first three months of this year, 34% more than the previous first quarter record set in 2013. This is an increase of 176 per cent on the same period last year. This is an increase in interest from last year, when banks bought 1,078 tonnes of jaggery metal. The top four buyers were Singapore, China, Turkey and India.
The reason for this is simple. They are trying to diversify their reserves to reduce the risks associated with global market volatility. It also acts as a hedge against unbacked money, which nations can simply create when needed. Over the past decade, they have accumulated large amounts of cyclical assets, such as bonds, in an attempt to preserve the economy. But in an era of high inflation and rising interest rates, they are losing value and causing losses for banks.
An economic stumbling block
Experts say that a new gold standard is not inevitable for the time being, despite various questions hanging over the BRICS group of countries. Brazil, Russia, India, China and South Africa have long sought to wean their economies off their dependence on the US currency. One of the considerations is that they could introduce their own currency that would be partially backed by this precious metal. The European Central Bank also entered the market, adding 1.74 tonnes of gold to its holdings.
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It’s not just a matter of storing the massive amount of metal and the associated costs, or its high price. According to some experts, this would also limit the amount of money in circulation, which would cause problems for economic growth and, for example, the application of flexible policies in times of economic crisis.
In practice, individual NBFCs can acquire metal in a variety of ways. They can either use the open market to purchase products directly from traders through various schemes, international transactions or through their own mining operations. It is important to note that each central bank has its own policies and strategies regarding gold purchases, and these may differ depending on their objectives, reserve policies and constraints. They can’t move the price very much, so they buy it at the market price. In the case of large transactions, the price can only be agreed upon by mutual agreement between the bank and the seller.
Analysts agree that despite the relatively high cost of exchange, demand for gold will continue to grow. Gold remains close to the psychological level of $2,000 an ounce; at the time of writing it was at $1,960. One ounce weighs 28.349 grams. Geopolitical tensions, the supply/demand ratio, but also inflation and rising interest rates are pushing values closer to all-time highs. “This combination of challenges gives gold room to grow in the coming years”. In this environment, Citigroup predicts that prices could potentially double from their current levels.
