Bottomline | What also glitters, is gold

Back to gold. While investors who bought gold in dollars have lost 1.2 percent in value since November last year, investors in 24-carat gold in India have earned a return of over 8 percent, that’s better than what any fixed income option has offered over the same period and isn’t much worse off than the 9 percent delivered by equities.

In fact, gold in rupee terms has had a healthy return track record, given the consistent decline of the rupee against the dollar. And the Indian chart for 24-carat gold shows a very secular uptrend over the years, primarily for this reason.

So, don’t scoff at gold. The historical returns and the currency hedge argument make a compelling case for Indians to keep their faith in the yellow metal.

What’s more interesting today is that the sanctions on Russia are driving several central banks in large and small economies to diversify their holdings beyond the currencies of other nations. And this is also sparking debate about the future role of gold.

Earlier this week, Ghana said it is working on a policy to buy oil with gold instead of US dollars. World Gold Council recently published a paper on this aspect titled: “International Reserves after the Russia Sanctions: A Role for Gold?” In the paper, Prof. Barry Eichengreen asks whether financial sanctions imposed on Russia and specific steps taken by a group of countries, led by the United States, to freeze the foreign reserves of the Bank of Russia will augur important changes in the international monetary and financial system to enhance the international monetary and reserve role of gold.

Interestingly, China seems to be in the news over likely gold accumulation to diversify its holdings. Reports point to the aggressive buying of gold by China and Turkey at a premium. According to World Gold Council’s November release for the July-September period, “Global central bank purchases leapt to almost 400 tonnes in Q3 (+115 percent QoQ). This is the largest single quarter of demand from this sector in our records back to 2000 and almost double the previous record of 241 tonnes in Q3 2018. It also marks the eighth consecutive quarter of net purchases and lifts the YTD total to 673 tonnes, higher than any other full year total since 1967”. That’s a startling amount of buying.

Even the RBI has been building its gold reserves. It bought 13 tonnes in July and 4 tonnes in September, pushing its gold reserves to 785 tonnes.

The question to ponder is if central banks are reposing their faith in gold, should you not? For investors, it is best to keep gold as a part of your portfolio, and today you have a range of options besides physical gold, to choose from.