Data Point. The central bank gold rush

Gold is a safe haven not just for ordinary folk but also for central banks in times of crisis. Remember India pledging its gold reserves to the International Monetary Fund in 1991? With only enough foreign exchange to cover three weeks of essential imports, India had to obtain a loan using its gold reserves as collateral to borrow from the IMF.

Fast forward to the present. With global currency volatility still high and a US rate hike looming, net purchases of gold by central banks hit a new record in calendar 2014. Gold demand trends for 2014, recently published by the World Gold Council, show that central banks absorbed 477.2 tonnes of gold in 2014. This was the second-highest net purchase by central banks in 50 years, the highest being 544 tonnes in 2012.

Data available as of end-March 2015 shows that 28,000 tonnes of gold reserves are stashed in the vaults of the top 20 countries. With total gold reserves of 557.7 tonnes, India is placed 11th in the list. The chart toppers include the US (8,133.5 tonnes), Germany (3,384.2 tonnes), Russia (1,207.7 tonnes), China (1,054.1 tonnes), Japan (765.2 tonnes) and Turkey (510.3 tonnes). The International Monetary Fund and the European Central Bank, which figure in the top 20, carry holdings amounting to 2,814 tonnes and 505 tonnes, respectively.

Four of the top gold owners — Russia, China, Turkey and India — have added to their reserves in the aftermath of the global economic crisis of 2008.

Russia has been the most active buyer, with its gold reserves steadily increasing in the last few years. After holding 350-400 tonnes since 2000, Russia’s buying began to gather pace towards the end of 2007. Holdings have tripled since then, moving up from 407 tonnes in mid-2007 to 1,208 tonnes now.

In 2014, Russia alone accounted for a little over one-third of the central bank demand for gold, accumulating about 173 tonnes. The last one year has been marked by tensions in Ukraine, international sanctions and a currency crisis precipitated by a drop in oil prices and a declining rouble.

If gold is held as insurance against crisis, it is also the first to be liquidated in the midst of one. Ukraine, on the other hand, cashed out on its gold reserves during the geo-political struggle. In the last one year, the country’s gold reserves declined 44 per cent to 23.6 tonnes.

Turkey also stepped up its gold holdings since the ‘Arab spring’ that shook many countries across the Arab world, in 2010-11. The protests and civil wars in many of its neighbours with whom Turkey had deep political and economic ties and an uprising in Turkey itself could have prompted the country to add to gold holdings. From about 116 tonnes in end-2010, its reserves have increased five-fold.

China too announced the doubling of its reserves to 1,055 tonnes in the last quarter of 2008. But the country is believed to be holding more than this, given that it does not make periodic disclosures. India moved up its gold reserves by 200 tonnes to 557 tonnes in October 2009, after buying from the IMF.

In terms of percentage share of gold in total reserves though, Russia, Turkey, China and India are not the leaders. The US’ 8,133 tonnes of gold amounts to about 74 per cent of its total foreign reserves, while countries such as Germany, France, Portugal, Venezuela, Greece and Cyprus hold 60-70 per cent of their foreign reserves in gold. In contrast, China’s gold reserves amount to only 1.1 per cent of its total foreign reserves, while India’s share stands at 6.5 per cent. Russia and Turkey hold 13-15 per cent.

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