The gold rush

Gold is back in vogue once again, with purchases made by global central banks pushing up prices to a five-year high. Five years ago, the world was going through a rough patch on account of the US Federal Reserve’s taper tantrum in 2013, which saw gold prices fall from $1,500 an ounce to as low as $1,072 in 2015, to subsequently recover some of the lost ground. In 2019, prices are already up 10 per cent in dollar terms at $1,407 an ounce. For investors, gold is a safe haven every time there is a crisis of confidence. The current rally in gold prices has roots in the ongoing trade tussle between the US and China. US-Iran tensions too have fuelled the rally.

 

Central banks such as those of Russia, China, and India were heavy buyers of gold in 2018, and so far this year the central banks of Kazakhstan and Turkey too have added to their gold reserves. According to the World Gold Council (WGC), central banks’ demand for gold soared to a multi-decade high of 651 tonnes in 2018, a 74 per cent rise over 2017. This is the highest since the dissolution of the Bretton Woods System in 1971. The Reserve Bank of India (RBI) now holds the 10th largest gold reserves, at about 613 tonnes.

 

The trade war between the US and China, the two largest economies globally, have pushed the world to uncertain territory. If the two do not come to an agreeable solution, there could be bloodbath in financial markets. China held $1.1 trillion in US government securities as of April 2019. And if it decides to offload some of it, the US dollar will likely nosedive. That won’t be good for other central banks holding dollar assets. Of India’s more than $400 billion forex reserves, $155.3 billion was held in US bonds, while the world as a whole held $6.4 trillion. The stakes are quite high.

 

But why is gold, which had seen central banks exiting the precious metal in the past, back in the reckoning? The answer is simple, there is hardly any alternative. China is the second-largest economy, and will probably displace the US from number one spot by as early as 2030, according to research estimates, but the yuan is a controlled currency, unlike the dollar. There is no doubt that the biggest weapon that the US wields now is the dollar, or “petrodollar” as strategic analysts like to call it. The world runs on fossil fuel and that cannot be bought without dollars. The petrodollar served the world order well for about 50 years, and might continue doing so for another decade or two. But alternatives are emerging fast. India itself is moving to an all-electric vehicle policy by 2030, which is expected to reduce its oil imports. On the other hand, it would increase India’s dependence on China for rare earth material needed to make batteries.

 

Besides diversification, there also seems to be an effort, for understandable reasons, to blunt the dollar’s potency as an economic weapon. Russia and China have taken the lead in that by accumulating most of the gold available for sale. US President Donald Trump’s haste on hiking tax on everything that hits the US shore is working subtly for countries to move away from a dollar-centric world. In such a scenario, gold is likely to trade with an upward bias in the foreseeable future.