Central banks, led by the People’s Bank of China, have been buying gold at unprecedented rates following the Russia-Ukraine war in order to de-dollarise their foreign exchange reserves. The purchases were spurred by Western sanctions on Russia that stranded half its reserves and effectively pushed bullion’s share of accessible reserves much higher than the 20% holdings. China, in contrast, has less than 5% of its $3.2 tn reserves, the world’s largest, in gold and is taking a cautionary approach over weaponising of the dollar. Its appetite for official dollar purchases is fed by its strategic relations with the US, which are unlikely to improve. This places the international gold market in a structural bull run even during phases, such as now, when the Chinese central bank has cut back on purchases possibly because of record bullion prices. The rest of the emerging economy pack, including India, is also piling into gold, with purchases in 2022 and 2023 among the highest on record. Emerging economies tend to hold relatively larger forex reserves and their gold holdings, relatively and absolutely, are lower than those of advanced economies. This again is contributing to structural change in the bullion market. Central banks will, however, have to tailor their demand to the broader market. Retail demand for gold is also being propped up by an oversized US fiscal deficit. The trigger for gold to cross $2,500 per troy ounce in August is the imminent interest rate cut by the US Federal Reserve.Politics is driving gold prices as global inflation cools after the pandemic monetary expansion. Lingering economic factors such as the US deficit and China’s property bust are also making gold more appealing as a safe-haven investment. India saw a decline in jewellery demand last year, but investment demand was up. Yet, India’s gold imports climbed 30% in 2023-24, but have tapered off in the first quarter of this financial year as more of the jewellery demand is met from recycled gold.
