Central bank gold purchases a hedge against sanctions risk: Gita Gopinath

Chennai: Several Central banks have been increasing gold holdings in their forex reserves. Gita Gopinath of International Monetary Fund finds that this is meant to hedge against economic uncertainty and sanctions risk.

“Looking at global FX reserves, the most notable development during 2022-23 has been an increase of gold purchases by central banks,” First Deputy Managing Director of IMF Gita Gopinath said in a speech. India is one among the countries which have been increasing gold assets in its forex reserves. It had added 19 tonnes to its forex reserves in the March quarter, which has a total of 822 tonnes.

Gold is generally viewed as a politically neutral safe asset, which can be stored at home and be insulated from sanctions or seizure. It can also be an inflation hedge but cannot be easily used in transactions, Gopinath said.

The share of gold in the FX reserves of the China bloc has been rising since 2015—a trend not exclusively driven by China and Russia. Importantly, during the same period, the share of gold in FX reserves of countries in the US bloc has been broadly stable.

This suggests that gold purchases by some central banks may have been driven by concerns about sanctions risk. This is consistent with a recent IMF study confirming that FX reserve managers tend to increase gold holdings to hedge against economic uncertainty and geopolitical issues, including sanctions risk.

In China the share of gold in total FX reserves has increased from less than 2 per cent in 2015 to 4.3 per cent in 2023. During the same period, the value of China’s holdings of US Treasury and Agency bonds relative to FX reserves has declined from 44 per cent to about 30 per cent. This reflects both net purchases and valuation effects.

The downward trend holds even if we account for the fact that some of China’s holdings of US bonds may be held in Belgium by Euroclear), as some analysts suggest, she added.