Value context and insight. lkm@koreatimes.co.kr
Central banks flock to gold amid uncertainty
By Lee Kyung-min
By Lee Kyung-min
Central banks from emerging market economies are increasing their gold reserves due to heightened uncertainty surrounding the U.S. dollar amid a fragile macroeconomic outlook.
The stable, central bank-led demand is driving up the cost of gold, a popular safe asset as investors move away from high-risk, volatile investments including stocks.
According to the World Gold Council (WGC), central banks added 374.1 tons to their holdings in the first six months of 2019, the highest volume in 19 years.
The amount was part of the 2,181.7 tons in total demand, which recorded a three-year high.
On Sept. 5, gold price hovered around $1,553.10, near last week's $1,554.56, its highest since April 2013.
The gold price has spiked around 19 percent in 2019 as the U.S.-China trade feud shows no signs of abating, coupled with a U.S. recession looming larger signaled by bond market developments. Also factored in was a rate cut by the U.S. Federal Reserve.
The central banks' increase in gold holdings began in 2018, when central banks bought 651 tons of gold, up 74 percent from a year earlier. This was the highest level since 1971.
Russia bought 275 tons in 2018, the largest amount ever purchased in a single year, followed by China, Hungary, Poland, Egypt, Kazakhstan and India.
The trend is expected to continue, according to Australia & New Zealand Banking Group (ANZ).
“In the current environment, where uncertainty in emerging-market currencies is high, we see good reason for countries like Russia, Turkey, Kazakhstan and China to continue to diversify their portfolios,” ANZ said in a recent research note.
“The People's Bank of China holds nearly 1,936 tons of gold, which equates to only 3 percent of its total foreign reserve holdings, giving the country plenty of room to increase its allocation.”
Park Chong-hoon, chief economist at SC First Bank, said gold is emerging as a safe asset recently amid slow growth, worsening trade disputes and geopolitical risks.
“Some emerging market countries seek to diversify away from the dollar,” Park said.
“Also, gold carries no credit risk, and its price generally increases in times of stress, as seen over the past few months. It is highly liquid, meaning that it can easily be traded in the global market. From the central banks' point of view, gold can also enhance the risk/return profile in the investment portfolio.”
The Bank of Korea said it has no immediate plan to expand gold reserves any time soon after it increased by 90 tons in holdings from 2011 and 2013 to 104.4 tons.
“Up until 2011, we held only 14 tons of gold in our reserve and the 2011 decision was to diversify our investment portfolio while maintaining stable and safe management of our reserves,” a BOK official said.
“We consider the holding volume is appropriate and do not see an immediate need to increase it. We will continue to monitor international market developments in making decisions concerning our gold reserve holdings.”