BT Explains: Why might MAS buy gold?

SINGAPORE topped up its gold reserves for the first time since at least 2000 this year. The Monetary Authority of Singapore (MAS) bought 26.3 tonnes of gold, accumulated over May and June.

Other central banks around the world have also added to their gold piles in 2021, with particularly sizable purchases in the first half of the year, according to the World Gold Council.

The Business Times looks at what might have prompted Singapore to make this rare move to increase gold reserves by 20 per cent, as well as some factors driving interest in gold across the board.

Guarding against a falling US dollar

If MAS is expecting major currencies to depreciate, stocking up on gold could be a way of hedging against these risks, said Bank of Singapore's currency strategist Sim Moh Siong.

Gold is typically denominated in US dollars, and the prices of gold and the USD tend to move in opposite directions. When the USD dips in value, gold becomes cheaper in other currencies. Demand increases and the value of gold then appreciates.

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"There has been a lot of quantitative easing since the Global Financial Crisis of 2008, and there have been even more increases in asset purchasing amid the pandemic. These could lead to currency debasement," Sim said.

In response to economic shutdowns amid the Covid-19 pandemic, the US Federal Reserve in March 2020 announced a quantitative easing plan of over US$700 billion. This was the fourth such operation since the 2008 financial crisis.

The Fed extended its programme in June last year, committing to buy at least US$80 billion a month in Treasuries and US$40 billion in mortgage-backed securities each month.

Quantitative easing increases the supply of money and lowers interest rates. It also leads to weaker exchange rates relative to other currencies.

An inflation hedge

Gold tends to increase in value as the purchasing power of the dollar falls.

The precious metal could benefit if concerns over inflation persist, Sim said. Demand for gold tends to increase during inflationary periods because of its limited supply.

Singapore's domestic interest rates are largely influenced by global market movements and especially by US rates, because the US is the world's largest economy. This means that once the Fed decisively turns hawkish, domestic rates are likely to follow.

Sim noted that while the Fed has been moving towards tapering bond purchases to control inflationary pressures, there is still scepticism over whether there is a political will to push forward with these plans.

He said: "(Gold) could still be a form of insurance. We don't really know how serious speculation risk could be. The Fed has been saying inflation could come down but it hasn't come down yet. And now we have this Omicron risk. It could add to speculation concerns and supply-chain bottlenecks."

In a 2-day monetary policy meeting that wrapped up on Wednesday (Dec 15), the Fed announced that it would speed up the tapering of its asset-purchase programme to right inflation. A majority of its members forecast 3 rate hikes next year.

Despite that, spot gold prices were up 0.44 per cent to US$1,784.81 per ounce as at 5.12 pm SGT (9.12 am GMT) on Dec 16. Gold futures were up 1.26 per cent at US$1,786.90.

How significant was Singapore's gold top-up?

Some observers noted that Singapore's recent gold purchases may not be much to shout about, in the context of the country's total reserves. According to data from the World Bank, Singapore's total reserves, including gold, stood at US$370 billion in 2020, while reserves excluding gold stood at US$362 billion.

UOB's head of markets strategy Heng Koon How pointed out that global central banks, including several in Asia, such as the People's Bank of China and Reserve Bank of India, have a long-term policy of prudent sovereign reserve management.

This includes "constant diversification" of some of their reserves into physical gold.

"In that context, the recent purchase of gold for reserves by the Monetary Authority of Singapore is not unexpected," he said.

In response to media queries, an MAS spokesperson said the change in gold holdings is a result of "continuous and ongoing efforts by MAS to ensure that the official foreign reserves (OFR) portfolio remains well-diversified and resilient through economic and market conditions".

"The change is a modest step in relation to the overall size of the OFR portfolio," the spokesperson said.

OCBC's chief economist Selena Ling noted there was no noticeable market reaction when the news was reported at the end of November. "Maybe this is because the increase is quite muted compared to the size of our foreign reserves position," she said.

The World Gold Council's head of central banks Fan Shaokai said several central banks have added gold to their reserves this year.

"According to our 2021 central bank survey, these institutions are increasingly valuing gold's performance during times of crisis. Furthermore, many central banks seek to increase their gold reserves to increase diversification or optimise their portfolios," he told BT.

The council expects net purchases of gold for the full year to exceed 450 tonnes.

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