RBI’s Steady Gold Accumulation
Over the years, the Reserve Bank of India (RBI) has been gradually increasing its gold reserves. Since 2018, there hasn’t been a single year where the RBI hasn’t added to its gold holdings. Some years, the increase is about 20 tonnes, while in others it goes up to 60 or even 80 tonnes. This consistent accumulation of gold reflects a global trend where central banks in many countries, like China, Russia, Turkey, and others, are also boosting their gold reserves.
Why Central Banks Choose Gold
One might wonder why central banks are focused on accumulating gold rather than other assets like silver or crude oil. The reason lies in gold’s deep connection with the global monetary system, which spans over 4,000 to 5,000 years. Historically, gold has been used as a store of value and as a form of money. It was only after 1971 that the direct link between gold and paper currency (fiat currency) was broken. Despite this, many believe that gold continues to play a crucial role in supporting the value of national currencies.
Concerns Over Unlimited Money Printing
One of the main reasons central banks hold onto gold is that it acts as a hedge against the risk of unchecked money printing by governments. When there is no limit on how much money can be printed, governments tend to spend freely, often borrowing more and creating deficits. In a household, constantly running on debt without ever balancing the budget leads to bankruptcy. The same can happen with nations if they continue to print and borrow without restraint. Gold, in a way, represents a disciplined approach to backing a currency.
The Disconnect Between Gold and Fiat Money
The detachment of gold from fiat currencies has had significant effects. In 1971, when gold was no longer tied directly to the dollar, the price of gold skyrocketed from $35 to $800. Typically, when the U.S. dollar strengthens, the price of gold weakens and vice versa. However, in recent times, something unusual is happening—gold is rising even when equities are doing well, signaling a potential shift in the financial system.
Gold as a Strategic Asset in Portfolios
Given the uncertainties in the global financial system, it may be wise to consider increasing the allocation of gold in one’s investment portfolio. While many people keep only a small portion, such as 1-3%, in gold, this might not be enough in today’s unpredictable world. A more significant portion, potentially 15%, could provide better protection against risks associated with currency devaluation and economic instability.
The Importance of Gold in Today’s Economy
Gold’s role in the financial system may have evolved, but its importance remains strong. In times of economic uncertainty, gold often serves as a reliable asset to preserve wealth. As central banks around the world continue to accumulate it, individuals may want to reconsider how much gold they hold in their own investments.
WeekendInvesting launches – PortfolioMomentum Report
Momentum Score: See what percentage of your portfolio is in high vs. low momentum stocks, giving you a snapshot of its performance and health.
Weightage Skew: Discover if certain stocks are dominating your portfolio, affecting its performance and risk balance.
Why it matters
Weak momentum stocks can limit your gains, while high momentum stocks improve capital allocation, enhancing your chances of superior performance.
Disclaimers and disclosures : https://tinyurl.com/2763eyaz
If you have any questions, please write to support@weekendinvesting.com
