The Reserve Bank of India may move forward to accumulating more gold as the yellow metal is expected to shine in the years to come, an analyst with a broking firm said on Wednesday.
"A weaker dollar could diminish the value of India's foreign exchange reserves and hence this could lead to further accumulation of gold by the RBI. This move will help India's central bank to hedge its downside risk on the foreign exchange reserves front," Angel Commodities Broking analyst Amar Singh said.
"India's gold holdings have dropped from over 20 per cent in 1994 to just 4 per cent," he said.
The RBI has purchased 200 tonnes of gold from the International Monetary Fund for $6.8 billion. This move by the RBI is to diversify its foreign exchange reserves.
"We feel the RBI could move forward to accumulating more reserves as gold is expected to shine for years to come. The Dollar Index has weakened sharply and at the same time gold prices have gained phenomenally," Singh said.
"Prices of gold are expected to rise further and this has initiated the move by the RBI to diversify the foreign exchange holdings."
India is the world's biggest gold consumer and the RBI's move indicates the central bank wants to diversify its holdings to protect against a slumping dollar, he said.
RBI's transaction is equal to 8 per cent of the world's annual mine production. The sale by the IMF is the first in nine years and has lifted India to the eleventh-biggest government owner of the precious metal globally.
India held gold reserves to the tune of 358 tonnes till 2008 and this addition of 200 tonnes has raised the gold reserve holding by a whopping 55 per cent. This purchase by the RBI could support international gold prices, Singh said.
Gold is traditionally considered as a safe haven investment. This development could be positive for the gold market and the yellow metal could test new highs in the coming months. What can further add to the upside in gold prices is the move by Russian and Chinese central banks to purchase the yellow metal, he said.
Technically after gold prices crossed a high of $1,033 per ounce in March 2008, prices have continued trading higher. The metal is in a secular bull trend and the dollar index is in a secular bear trend. This further indicates that a weaker dollar could continue to support an upside in gold prices as it makes the metal look attractive for holders of other currencies, the analyst said.
Singh said the investment demand for gold is likely to rise on the back of higher demand from exchange-traded funds and high networth individuals. This rise will help compensate for the decline in consumer demand for jewellery and fabrication on the back of high prices.
