Gold is heavy. Moving it is an onerous task. Yet, the Reserve Bank of India (RBI) has been on a mission to haul its holdings across the high seas into vaults within the country.
As an RBI report reveals, over 510 of the 854 tonnes held in reserve are now in India, with much of the rest lying with the Bank of England and Bank for International Settlements.
At the end of 2021-22, only 39% of our 760-tonne stack was in domestic custody. Today, it is 60%. Not only has our central bank been buying more, it seems keen on actual possession.
As the global price of gold shot up over the past year, a rise that generated a buzz around it among retail buyers, enlarged tonnage seems to shine out as a worthy endeavour. But should households follow suit by locking away more of this shiny stuff in their own lockers?
Note that central banks and retail investors differ in their motives. In many countries, the former have a reason to diversify their forex reserves, of which gold remains a part—even if it’s seen as a relic from the days when bullion settled trade dues and backed currencies.
After the Ukraine War led the US and its allies to freeze Russia’s dollar and euro assets in 2022, many central banks sought fortification against the risk of such clamps. Notably, China has bulked up on gold, as have other countries. In fact, bulk purchases partly explain its price upshoot.
After all, it’s a classic hedge not just against inflation but also any uncertainty that may haunt the global financial order: should instability strike, gold would not just survive, but gain as others pile into it as a store of value.
With geopolitics having taken a sharp turn for the worse after the covid pandemic, robust demand was a given. While gold offers no periodic payback or yield, it serves as an alternative to US Treasury bonds for safety seekers.
Historical trends show gold typically going up as those bond yields fall, and vice-versa, since investors tend to switch back and forth. Gold’s recent gains, though, have defied that pattern.
Since inflation has softened globally, unease over key assumptions of finance seems to be the principal price driver. While RBI’s gold buying pre-dates the West’s Russian asset freeze (and has been decidedly steady), hauling chunks of it home is a more recent call.
So, should other investors in India do likewise? Gold coins are available at the swipe of a thumb on quick-delivery platforms, home delivered within minutes. Jewellery demand has always been heavy, especially in the festive and wedding seasons.
While the dazzle of these acquisitions may satisfy psychological needs, a prospective buyer looking for value appreciation doesn’t need gold in physical form to meet this purpose.
Simply keeping it secure is a burden, not to mention moulding costs, GST levies and the purity checks often needed for a sell-off (or gold loan).
In the age of demat assets, there are better ways to bet on the metal. In terms of liquidity, returns and ease of ownership, such investors would be better served by gold exchange traded funds (ETFs), which can be bought and sold like shares.
For longer-term investors, an attractive option lay in sovereign gold bonds—offering 2.5% annual interest plus a tax holiday on their redemption value at the end of their eight-year tenure—but issuances of these seem to have dried up.
Still, if exposure to gold is the basic aim, then it’s best to go for dematerialized options. Whether gold will rise much higher, though, is another matter.