Here’s how China’s decision to buy gold again will affect India

• Data from the People’s Bank of China showed that gold reserves had increased to 59.56 million ounces by the end of 2018 after remaining unchanged at 59.24 million ounces since October 2016.
  
• Gold prices have already been on the upswing owing to the asset’s safe haven status amid US-China trade tensions, and will only increase further if the US Federal Reserve holds off on further rate hikes.
  
• This doesn’t bode too well for India, which imports gold and roughly accounts for a quarter of global demand.
  

As the end of 2018 neared, China added to its gold reserves for the first time in two years. Gold is traditionally considered a hedge, or safe haven asset, during a cyclical downturn.

Data from the People’s Bank of China, the country’s central bank, showed that gold reserves had increased to 59.56 million ounces by the end of 2018 after remaining unchanged at 59.24 million ounces since October 2016.

While it may be too soon to tell whether China - which is the world’s largest miner of gold - will continue adding to its gold reserves this year, it seems more likely than not as the country braces for an uncertain 2019.

Last year proved to be a particularly tough one for the Chinese economy.

As tensions between the US and China reached a fever pitch over trade issues, emerging markets were roiled as investors fled back to developed markets.

Making matters worse was the drag on investment following the Chinese government’s initiative to reduce debt and curb financial risk, especially at state-owned enterprises, which slowed the economy down further.

Higher buying by China will translate into an increase in gold prices, which have already been on the upswing owing to the asset’s safe haven status amid US-China trade tensions, and speculation that the US Federal Reserve will hold off on further rate hikes.

It bears mentioning that US government bonds are also considered a safe haven asset, and become more attractive as interest rates rise. As the Federal Reserve presses pause on its rate tightening cycle, the relative attractiveness of gold will increase as other central banks around the world buy more of the precious metal as opposed to US government debt.

This doesn’t bode too well for India, which imports gold and accounts for roughly a quarter of global demand.

Costlier gold will push up India’s import bill, and consequently the trade deficit, which is the difference between the country’s exports and imports. A wider deficit will weaken the rupee and make imports even pricier.

All of these will be a drain on the country’s dollar reserves. High gold prices will also hurt Indian farmers, who mainly prefer to invest in gold as opposed to other financial assets.

The increase in global prices of gold could also cause the Reserve Bank of India (RBI) to temporarily hold off on its gold-buying programme, despite having originally stated otherwise.

In September last year, the RBI bought gold for the first time since 2009 in a bid to diversify its foreign exchange reserves and stabilise the falling rupee. The central bank bought nearly 8.5 metric tonnes of gold between December 2017 and June 2018, bringing its overall level of gold reserves to 566.3 metric tonnes.


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