‘Central Banks May Buy 5,000 Tonne of Gold Over 10 Years’

In recent times, high gold prices have put off households and investors. But Aram Shishmanian, CEO of World Gold Council, 
strongly feels that economic uncertainties and wealth destruction that the world witnessed in the last few years can only make gold more relevant. The return of Obama and hopes of another round of quantitative easing has once again pushed up the yellow metal. As the Council tries to convince central banks of the importance of building gold reserves, he toldRamkrishna Kashelkar that investment demand would surge in the days to come. 

How do you see the global gold market today? Globally, gold is undergoing fundamental shifts in the nature of its demand. We are seeing a new relevance to gold emerging. For the past 10 years, central banks over the world were selling gold. They sold some 5,000 tonne over the last decade. Since the last two years, they have started buying gold again because they are reassessing their risk management approach. As you know, the whole crisis in the US and in the Europe was driven by bad risk management. In the next decade, they could be buying back over 5,000 tonne gold or an average 500 tonne per annum. Countries would increasingly prefer holding gold as part of their multicurrency forex reserves. 

So you believe investment demand for gold will grow rapidly? Yes, the investment market will grow dramatically even at the retail level. A few years back, it was just 5% of the market, now it is 40%. Why? People in the US and Europe have lost 20-40% of wealth in the last few years. Hence, people have started looking to hold part of their funds in gold to protect wealth and make sure they don’t stay under-funded for their future. Gold may not be ‘the answer’ to the wealth destruction problem, but it is an important contributor. This is relevant for India as well. If Indians had not protected their wealth all these years through investing in gold, they would be much less wealthy and perhaps even face some of the challenges the Americans are facing today. With increased sophistication of the financial system and suitable policy changes, the demand for gold-linked investment product is going up. Gold demand is shifting from coins or bars to financial products like ETF. 

But aren’t high prices impacting demand? That’s true. Last year, India’s demand for gold stood at . 2.3 trillion or around 980 tonne. This year, it has come down mainly due to factors like devaluation of the rupee against the US Dollar and a relative slowdown in the economy. Gold price had peaked to . 3,400 per gram earlier this year and that has no doubt had an impact on gold demand. Still, considering the most important last quarter is still to go, even in a worst-case scenario, the annual demand is not expected to fall more than 10% from last year’s level. When compared to other discretionary expenditure, gold has done better than anything else in India this year. 

What do you have to say on gold lending in India? Leveraging is a very sound usage of gold and it is good that it is growing in India. Using gold as collateral with no intention to sell it has a real value. In fact, we have been working with European central banks to use their national reserves to guarantee government bonds. This can considerably reduce interest rates. This idea is getting a lot of attention now.

Last year, India’s demand for gold stood at . 2.3 trillion or around 980 tonne. This year, it has come down mainly due to factors like devaluation of rupee against the US Dollar and a relative slowdown in the economy. Gold price had peaked to . 3,400 per gram earlier this year and that has no doubt had an impact on gold demand.
    ARAM SHISHMANIAN
    CEO, World Gold Council