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Should Bangladesh Bank scale up its gold holdings?

13 August 2020


Gold. The precious yellow metal that is universally considered a haven when things go wild and the certainty of everything is questioned -- as in the times we are in.No had imagined that a rogue microscopic organism would ever bring the world to a standstill and send the global economy down a rabbit hole, prompting governments, particularly the US's, to debase their fiat currencies and push real interest rates to all-time lows.


This has left many central banks around the world to consider ramping up their gold purchase this year in an attempt to diversify their reserves away from dollars, as per a survey conducted by the World Gold Council in May.About 20 per cent of the central banks surveyed intend to increase their gold reserves over the next 12 months, compared to just 8 per cent of respondents in the 2019 survey.But the Bangladesh Bank, the country's central bank, has no such plans. BB now holds 13.96 tonnes of gold, which 2.33 per cent of its foreign exchange reserves worth $37.48 billion as of 5 August.


The practice of investing in gold by both institutions and individuals is unheard of in Bangladesh, said three BB officials who are directly involved with the operation of the foreign exchange reserve.For this reason, there is a shortage of experts for analysing the projection of the global gold market."This has created a roadblock in taking a decision to this end," said one of the officials.BB has invested 85 per cent of its foreign exchange reserves in different top-rated commercial banks and the Federal Reserve, the central bank of the US, whose products are almost all pinned to the US dollar.


The rest of the reserve has been invested in the pound sterling, Australian dollar, Canadian dollar, Singapore dollar, Chinese renminbi and Japanese Yen.But the US Federal Reserve and other major central banks signalled that they will remain firmly in easing mode for an extended period as the economic fallout from the pandemic looks increasingly likely to linger.The trend of the ongoing recession has already given an indication that the economic recovery is likely to be a slower 'U' or a more volatile 'W'-shaped. It will take 12-24 months to get economic recovery as per the definition of 'U' while 'W' means an economy fall double-dip recession consecutively.


This mean, the yield curve to their securities are abnormally low or even below zero.For instance, the yield on the 10-year US benchmark T-bond dropped 0.05 percentage points to a record low 0.52 per cent last week, according to the US Treasury department.This gives gold a competitive edge, as it bears no interest of its own and investors don't sacrifice lost interest income by holding it when bond yields and savings rates are low or near zero.This has sent investors piling into gold, vaulting the prices for the precious metal, which is a safe but a yield-free asset, to a record high of $2,063 an ounce last week.


And the precious metal, which is the only currency that cannot be printed, is especially in-demand during economic crises as a shield against inflation. When the Federal Reserve floods the economy with cash, like it is doing now, dollars can get less valuable.Gold prices declined slightly to $1,864 early on Wednesday as the interest rate on the 10-year US bond increased slightly. But by mid-afternoon, the price of the yellow metal went up 1.3 per cent to $1,935 an ounce.


As much as 88 per cent of respondents in WGC survey say that negative interest rates are a relevant factor for their reserve management decisions.The continuation of expansionary monetary policies due to the coronavirus pandemic, which coincided with the fieldwork of this survey, will likely keep interest rates near zero for the foreseeable future.Furthermore, 79 per cent of respondents view gold's performance during times of crisis as an important reason to hold gold, up from 59 per cent in 2019.


Besides, 74 per cent of respondents consider gold's lack of default risk to be an important reason for holding the metal, up from 59 per cent in 2019.Besides, since the 2008 financial crisis, a good number of central banks have widened their gold reserves to mitigate the risks deriving from the fiat currency system. After the recession, many countries have invested hefty amounts of their assets into gold reserves.Similarly, BB in 2010 also bought 10 tonnes of gold formally for the first time from the International Monetary Fund to diversify its investment of the country's foreign exchange reserve."We did not buy any gold after 2010. And there is no thinking to purchase the precious metal once again to keep up with the time," said one of the three central bankers.


The price of the gold will hover until at least the end of the ongoing recession, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.Gold is on the whole considered as a "safe haven" asset in times of recession as it is less volatile than other investments.He, however, said there is no need to invest in anything like gold or other products given the profit on a short-term basis.


"The US dollar will dominate the global market for the next 15-20 years. So, the central bank should gradually get ready to shift investment from the dollar to the other products in time," said Mansur, also a former high official of the International Monetary Fund.Gold has a traditional inverse relationship with the dollar: the metal's price will increase when the greenback depreciates.But the weakening dollar is among the market factors aggressively driving the push into gold.


Central banks, however, cut their purchase of gold in the first half of this year, according to another WGC report.Between January and June, global central banks bought 233.4 tonnes of gold on a net basis, down from 39 per cent year-on-year.The ratio is also 6 per cent lower than the 10-year first half average of 247 tonnes.Global central banks bought a record of 385.7 tonnes of gold in the first half of last year.


But, the declining trend of gold purchasing by global central banks is a temporary phenomenon as they are now in a state of crisis due to their effort to fight against the financial meltdown.Against the backdrop, the central bank should start to frame a roadmap to invest its reserve into gold in the days ahead.This will also help it trade off the loss because of its investment in different short-term investment in both global central banks and commercial banks.