“More Gold Wanted,” Say Central Banks. How Will it Affect the Price?

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The central bank of India expected to join China, and Russia's banks in gather gold in 2019, increasing the record levels of holdings as well as offering support to the worldwide gold demand as the highest economy differentiate their reserves.

The purchases of The Reserve Bank of Indian form part of a bigger picture in developing economies, seeking to de-dollarize foreign-exchange reserves, so says Ross Strachan of Capital Economists Ltd. The buying trend at RBI can be managed for a few years in its relatively small amounts, as a part of its long-term diversifying plan, Strachan said.

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The bank might buy about 46.7 tons (that’s 1.5 million ounces) this year, according to the economist at Oversea-Chinese Banking Corp., Howie Lee. He says that they have an outlook that is based upon extrapolating amounts that were bought in January and February this year.

Last year, the Indian bank increased its hoard by around 42 tons, and with the amounts added in the first two months of the year, the gold reserves in the country are at an all-time high of nearly 609 tons, so says the data provided by the International Monetary Fund. China has started up its December spending spree again while Russia purchased 274 tons last year as well as adding more this year. Official sector purchases of the precious metal could potentially reach 700 tons globally this year, led by these nations in addition to Iran, Kazakhstan and Turkey, Citigroup Inc. claims.

The increased economic, geopolitical uncertainty forced central banks into diversifying reserves as well as focusing on their investments in liquid and safe assets, with their governments globally adding around 651.5 tons last year, which is the second-highest amount on record, the World Gold Council claims.

More inflows will also be supportive of the prices, which are expected to reach a similar price as 2018 in Russia, China, and Kazakhstan, the Goldman Sachs Group Inc. states. Since peaking in the middle of February, Spot gold lost around 5.6% as the equities rallied.

"There seems to be some form of a pattern, not just the RBI, that central banks tend to increase gold reserves when the global macroeconomic environment is uncertain. It’s no coincidence that one of the biggest buyers of gold in recent months was China, which is in the midst of trade tensions with the U.S. and may have been seeking to diversify its trillions of dollar reserves," OCBC’s Lee said.

He also said that India might be following similar tactics in their diversification.

The U.S-China trade war has been disrupting supply chains, markets as well as weighing on the global economy. Last month, Donald Trump announced that he is looking to end trade preferences for Turkey and India, and he notified Congress that he intends to "terminate benefits," with a 60-day countdown before taking action on his authority.

The RBI declined to comment, their annual report of 2017-2018 that was released last August pointed out that its “gold portfolio had […] been activated” as well as its Forex diversification.

Diversification

The Federal Reserve has signaled a pause on the hike in interest rates and this accompanied by the rising deficit in the U.S. could be reasons why the RBI might increase its gold stash, Shekhar Bhandari says. Bhandari is the business head of global transactions and banking and precious metals in Mumbai at Kotak Mahindra Bank Ltd.

The Forex reserves in India are steadily improving, and inflows into the foreign fund "are strong, hence buying U.S. Treasuries, and gold will help keep the rupee on the weaker side and give a boost to exports," Bhandari said.

Asia’s worst performing of the major currencies in 2018, the Indian Rupee, has gained strength in the last few months thanks to steady inflow into the debt and equity markets. However, investors are still wary of any risks such as increases in oil price or swing in global risk appetite as well as the country's federal elections.

More diversification is possible. India's holdings of gold are in the top ten biggest by country, yet they account for just 6.4% of their reserves, in comparison with over 70 in the U.S. and Germany, as shown by WGC data.

Carsten Frisch, a senior commodity analyst in Frankfurt's Commerzbank AG, said "This is an argument for further buying. It is too speculative to say how much gold the RBI will buy this year. It could be more than last year, though.”

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