How Is Gold Investment Enabling Central Banks To Reduce Their Dollar Exposure?

How Is Gold Investment Enabling Central Banks To Reduce Their Dollar Exposure?

Gold prices are moving forward and backward over different global events, with gold spot (XAU) first dropping from $1346.79 (day’s high on 20th February) to $1280.93 (day’s low on 7th March) and then again rebounded from the same level to $1311.30 (day’s high on 13th March). The reason which accounted for these fluctuations were mainly U.S-China trade talks, concerns on Brexit, dollar and bond fluctuations and many more.

However, these events and economic indicators all skipped one thing in the status quo. i.e., the constant buying of gold by various central banks. Why did they do that? To reduce their exposure to dollar prices.

Central banks as a whole bought 651.5 tonnes of gold in 2018, which marked multi-decade high of central banks’ buying. Russia, Turkey, and Kazakhstan remained key buyers throughout the year. In the recent event, People’s Bank of China started building their gold reserves; the bank bought 32 tonnes of gold over the last three months.

 The central banks’ gold buying was in wake over the building tension between the U.S. and other major economies, which marked high volatility in the currency market. The high volatility in that market exposed many major economies to the interest rate risk. To avoid the interest rate risk the central banks started buying gold, as gold reduces the dollar associated risk because it is generally observed that the dollar and dollar dominated asset such as gold shows an inverse correlation.

Another reason which came in the limelight, which prompted the central banks to buy more gold was the major concerns over the global economic slowdown. The International Monetary Fund (IMF) jolted the market from its outlook in the global economy and warned that the global economy might be heading towards a period of recession.

The significant contributor towards the outlook of the International Monetary Fund was the U.S-China trade war and the U.S. President Donald Trump reluctance to reach any resolution. The higher tariff war among major economies further supported the IMF view and to prevent from the consequences of the global recession such as high inflation, led these banks to buy gold to support its country if any such event occurs.

On the economic front, the lower figures of various indicators such as Employment rate, CPI, PPI, etc., instigated fear among the major economies that they might be heading towards a period of slower movement, which further justifies the high buying from these institutions.

On account of falling equities market and decreased return from other assets in 2018, the gold-backed exchange traded funds increased their net buying, which helped gold prices to climb till $1346 a troy ounce mark.

In a nutshell, the year 2018 remained positive for gold on account of global uncertainties, higher market discount rates, less rate of return from other assets. However, the starting of March have seen gold prices dipping and again crossing the level of $1300, where the prices are currently hovering. To gain further insight into gold prices, the investors are eyeing on the global economic development and response of dollar as per the prevailing events such as the U.S-China trade talks, Brexit, etc.


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