Gold Reserves

Syllabus: GS3/Economy

Context

• India’s gold reserves currently total 854.73 metric tonnes, according to a recent Reserve Bank of India (RBI) report.
  • Of this, 510.46 metric tonnes are held within the country, while 324.01 metric tonnes are stored with the Bank of England and the Bank for International Settlements (BIS).

About

• Gold now makes up 9.32% of India’s total foreign exchange reserves, a rise from 8.15% in March 2024. 
• On a global scale, India ranks 8th for gold reserves. The top-ranking countries are the United States, Germany, and Italy, with the U.S. holding nearly as much gold as the combined reserves of Germany, Italy, and France.

Gold Reserves

• Gold has lower co-relation with other asset classes and, therefore, provides a safety cushion during periods of geopolitical stress and prevailing economic uncertainty and/or downturn in markets.
• Prices of gold are suggested to hold an inverse relationship with interest rates. 
  • When interest rates are tightened gold becomes less attractive to investors as they do not offer any yield. 
  • Conversely, lower interest rates coupled by a weaker dollar can prompt investors to also opt for the safety bullion cushion. 
• Central banks accumulate gold for several reasons:
  • Monetary Stability: Gold provides a store of value and is often used as a safeguard against economic uncertainty.
  • Currency Support: Gold reserves enhance a nation’s currency credibility, as it is seen as a backing for the currency’s value.
  • Investment Diversification: Holding gold diversify a central bank’s assets, reducing risk in their investment portfolios.
  • International Trade and Payments: Gold reserves facilitate international trade and payments, serving as a universally accepted form of currency.
• Countries with significant gold reserves include the United States, Germany, Italy, and France.

Gold Reserves Strategy

• The RBI continues to retain 324 tonnes of its gold reserves under the protection of the Bank of England and the Bank for International Settlements, which collectively hold a substantial portion of India’s gold abroad. 
• The Bank of England, established in 1697, is renowned for its extensive gold storage facilities and remains the world’s second-largest gold custodian after the New York Federal Reserve.
  • Storing part of India’s gold in London provides the RBI with immediate access to the London bullion market, allowing for enhanced liquidity. 

Source: TH