More than 30 per cent of India’s official gold reserves, or the bullion held by the Reserve Bank of India (RBI), has returned home in the past 30-odd months. By end-2022, most of the gold owned by the central bank was held abroad, mostly in the Bank of England. Since March 2023, more of the yellow metal has started to come back to its native place. During the first six months of this fiscal year, the RBI transferred more than 60 tonnes from foreign vaults to the domestic ones, taking the total that has come back since 2023 to 275 tonnes. Thus, at present, two-thirds of the 880 tonnes of gold that India owns as a nation is back. Just under 300 tonnes remains in the external custody. Experts dub this as the reverse gold rush. Apart from buying gold in the recent past, the central bank has ensured that most of its bullion holdings are back home, and safe with it.
The RBI is not alone in such endeavours. Most central banks, including those in developed nations, have decided to store their gold at home, rather than in foreign locations. According to a media report, “Physical security and access to a country’s gold reserves are increasing concerns. The trend began about a decade ago when some central banks decided to move some of their gold holdings back from the US, the UK, and France (where they were transferred during the world wars).” It adds that a recent study (2024) shows that 68 per cent of the central bank respondents keep gold onshore, compared to 50 per cent in 2020. Still, the majority of national gold reserves continue to remain in the US and Britain. Since London and New York are bullion trading centres, it is easier for central banks to loan out gold, or execute trades if the reserves are stored in those nations.
In fact, in the current context, 2020 perhaps marks the beginning of a new tryst between gold and central banks. Central banks’ purchases indicate that the upward or buying trend started in 2008 during the Great Recession, or Financial Crisis. From just over 40,000 tonnes, the overall holdings went up to over 45,000 tonnes by 2020. Since then, the central banks added another 1,000 tonnes or more in less than three years. At present, the US, which has not brought anything in the recent past, is the highest holder with more than 8,000 tonnes, or nearly 10 times India’s. Nations like Germany, Italy, France, Russia, and China hold more than 2,000 tonnes each. Switzerland has over 1,000 tonnes. More than investment, central banks see gold as a safe-haven, and a hedge during crises. Moreover, its value “does not depend on the commitment of any single sovereign, which makes it attractive for the central banks.”
One can understand why the buying by the central banks surged in 2008. At that time, there were deep concerns over the future of paper currencies, and their exchange rates. Most experts, including central bankers, and policy-makers felt that the global economy was in for a great depression that would be worse than the 1930s. Fortunately, the US recovered fast, and so did the emerging markets. Europe took a longer time, but its strongest economies like Germany and France remained resilient. Then came the pandemic. Although the recovery was amazingly fast this time, the central banks were worried. The dollar began to weaken, which was surprising as the currencies in emerging markets like India declined against the dollar. Central banks in developed economies shifted their reserves from the dollar, which had remained the currency of dominance, acceptance, and consequence in the last century. India, and China followed.
For India, as mentioned earlier, the problem was two-fold. Dollar was in a decline, and so was the rupee. The most acceptable solution to counter both was to buy gold. While the bullion would prove to be a hedge against the dollar, as reserves shifted, the larger reserves of the yellow metal would boost the rupee, as it gave gravitas to the economy. More gold in the reserves indicates economic strength, irrespective of the price of the gold. If gold prices zoomed, as they did over the past few years, and especially in the past 12 months, it was a case of double bonanza. In fact, a few emerging economies took advantage of the soaring value, and sold some of their reserves. They faced criticism as prices rose further. Even today, a few central bankers feel that it is time to sell a part of the gold reserves. But the overall mindset is to hoard more, as much as one can.
Russia forced the central banks not just to buy more, but bring back the gold home. Due to the Russia-Ukraine war, which was blamed by the western nations on Moscow, global sanctions were imposed. Russian assets, including the gold and dollar reserves, were frozen by the western banks and central banks. Suddenly, in a matter of minutes, Moscow lost control over its gold. This was a shock not just for Russia but for others. Central bankers across the world woke up to the new reality. Even their gold in London or New York could be seized for some reason or the other. It was time to ship the gold back to ensure its security and accessibility. This is when India began to reverse the flow. The freezing of Afghanistan’s assets added to the urgency. It was better to hold the gold in domestic vaults, rather than in the foreign ones. A tonne of gold in hand, or close by, was worth two tonnes in the Bank of England’s vault.
According to a recent article, “Gold’s value is intrinsic; it is not tied to any single sovereign entity. As a result, it is increasingly seen by central banks as a hedge against volatility, and geopolitical risk. Given that these risks remain elevated, gold is likely to become a more significant part of central banks’ portfolios to preserve value and, if necessary, a means of exchange. The distribution of gold holdings may also become more disbursed, away from the traditional western financial centres to increasingly reflect the changing geopolitical landscape. In effect, gold has become a growing part of a longer-term strategy for diversifying foreign exchange reserves.” The Shanghai Gold Exchange in China is becoming more prominent in trading. It can be an alternative for non-western allies.