Amid global economic turmoil and de-dollarisation, can gold be the next international currency?

The price of gold has surged over 10 per cent since the start of the year, cementing its status as a preferred hedge against inflation and a sanctuary amid political and economic uncertainty. Representational image.

In a strategic move reminiscent of Indian households safeguarding their wealth, the Reserve Bank of India (RBI) is fortifying the nation's economic resilience by actively acquiring gold reserves. This bold initiative mirrors the prudence of household savers, as the central bank positions itself to shield against potential economic turmoil and bolster the country's financial stability.

The RBI now has accumulated gold reserves of 817 tonnes. This surge can be attributed to a combination of factors including escalating tensions in West Asia, Israel assault on Palestine, the Russia-Ukraine war, and persistent inflation, all of which have heightened the appeal of gold.

Central banks worldwide are actively accumulating gold to diversify reserves and reduce dependency on the US dollar. China, in particular, has been on a gold-buying spree for the 17th consecutive month, aiming to hedge against currency depreciation and geopolitical risks. The world is unofficially going back to gold standards it abandoned in 1971.

India was also hit by a continuous six-day fall in the stock market. The loss was estimated at Rs 7 lakh crore.

The household savers, of course, got their savings dipped as unemployment and rising prices hit them. The RBI in a clarificatory note on May 9, mentioned that “They are putting their savings into real estate and the central bank is not worried of the phenomenon.”

The bank itself has stepped up gold purchases to “help diversify its foreign exchange reserves base amid US dollar volatility”. The US inflation rate in February hit 3.2 per cent year over year. Since the Federal Reserve began raising rates in 2022, it has raised rates to 5.25 per cent to 5.5 per cent in July 2023. It is holding further raises in view of the US elections.

The price of gold has surged over 10 per cent since the start of the year, cementing its status as a preferred hedge against inflation and a sanctuary amid political and economic uncertainty. This significant uptick is largely due to considerable purchases by central banks and a rising demand for safe-haven assets.

Gold prices, in India, have been experiencing a significant surge in 2024, with a remarkable rally that has propelled them to an unprecedented all-time high of over Rs 73,000 per 10 gm two days before Akshay Tritiya, when customary gold purchases reach a peak. This surge represents an impressive increase of approximately 21.1 per cent within the span of just one year. On the day of Akshaya Tritiya on May 10, it has slightly dipped to Rs 72,788.

Over six months, domestic gold prices surged from Rs 54,000 per 10 grams to a record high of Rs 73,958.

One can realise that nothing can appreciate faster than the gold and can’t question the RBI’s sagacity. One dollar is at Rs 83.88. Rupee is expected to rise to Rs 82.50 in six months, a gain of about 1.1 per cent, and in a year it could rise to Rs 82 — a gain of 1.7 per cent. It means the RBI dollar reserves would lose about 2 per cent value in a year. So, the RBI has decided to buy more gold than dollars. Its investment would be less at even Rs 73,000 for 10 gm and gains over 20 per cent. That’s an intelligent economy.

The RBI has increased gold purchases to diversify reserves, with gold value contributing to a $3 billion rise in forex reserves to $648.5 billion. RBI acquired more gold in early 2024, aiming for diversification and inflation hedging.

The World Gold Council (WGC) says that RBI gold purchases touch 19 tonnes during January-March. This dwarfs the 16 tonnes of gold it bought in the whole of 2023.

In terms of countries with the highest gold reserves, the US leads with 8,133 tonnes, followed by Germany, Italy, France, and the Russian Federation with 3,366.49, 2,451.84, 2,436.01, and 2,271.16 tonnes of gold, respectively, according to WGC.

The surge in central banks' gold acquisitions stemmed from the aftermath of the US imposition of sanctions on Russia. These sanctions, triggered by Russia's invasion of Ukraine, included freezing Russian reserve dollars and imposing restrictions on crucial commodity trades such as crude oil. The global repercussions of these measures were profound, exposing vulnerabilities within Western financial institutions.

The option of investments in the stocks has become riskier.

In February, China divested an additional $22.7 billion in the US Treasury securities, as per the latest Federal Reserve data, reducing its total holdings to $775 billion. Despite this decrease, China retains its position as the second-largest foreign holder of U.S. debt. China is reducing its dependence on dollars, as per US Federal Reserve data.

According to ICICIdirect study, the RBI wants to diversify its foreign exchange reserves and reduce dependence on the US dollar. Gold offers stability and isn't directly tied to the performance of any one currency. It can be especially valuable during times of economic uncertainty or fluctuations in the dollar's value.

Gold is considered as a hedge against inflation. When the value of currencies weakens due to inflation, gold tends to hold its value or even increase. It protects the purchasing power of India's foreign reserves.

The diversification of the portfolio to gold reserve, RBI says, can inspire confidence in the Indian economy from foreign investors. It signals a strong financial position and stability, potentially attracting more foreign investment.

While less common today, gold can still be used for international transactions. Holding a gold reserve allows India to settle debts with other countries if needed, or if those countries aren't willing to accept rupee.

The next few years can be times of turmoil and gold can be a stabilising factor in the international economy. It is particularly so as the IT sector, industry, markets are in a destabilised condition and would take time to calm. At such volatile times gold is likely to be more in demand than paper currencies. The RBI has resorted to the right move, aiding the Indian economy, which has been striving to become one of the major world economies.

The writer is a senior journalist. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.