By Madhurima R S
MUMBAI: What will happen if Brazil, Russia,India, China (BRIC) nations with huge foreign exchange plan to diversify their foreign exhange reserves and reduce their holdings in dollar-denominated assets?
The chances are that money could flow into gold and gold will turn bullish. Brazil, Russia, India and China have accumulated huge foreign exchange reserves over the years. With the future of US dollar uncertain and likely to depreciate further, gold could be the beneficiary, according to a report by Quantum Gold Fund.
If Bric nations allocate one percent of their foreign exchange assets to gold, that would create an additional demand for 1000 tonnes of gold which is sufficient to turn the gold market bullish.
Already various reports suggest that US financial crisis has had far reaching impact all over the globe.
“Governments across the globe can print currencies at will, in an attempt to tide over current problems they face. These can give temporary relief. But is it a long term solution? Definitely not. However, Gold is the only asset which cannot be produced in the desired quantities at will. Gold has an intrinsic value and is widely accepted as a monetary asset. Hence under these circumstances, Gold would certainly be a preferred asset for diversification by the BRIC Countries or for that matter by all kinds of investors across the globe,” Quantum Gold Fund said in its report.
As per the data available for the first quarter of 2008, only 1.6% of the total foreign exchange reserves of BRIC countries was invested in Gold. Foreign exchange reserves of the BRIC Countries stood at US Dollar 2.7 trillion at the end of the first quarter of 2008..
If BRIC countries diversify their assets into gold, many other countries can also be expected to follow a similar trend and increase allocations of their foreign exchange reserves to Gold.
The annual fresh supply of Gold from mines across the world is less than 2,500 tonnes per annum. Besides, no significant Gold discoveries have been made during this decade. The demand for Gold in 2007 was around 3,500 tonnes. Central banks who have been making up for the shortfall have been seen selling lesser and lesser each year, over the past few years.
What would a 5% additional diversification by BRIC countries do to Gold demand? - an additional demand for 5,000 tonnes of Gold. Imagine the impact on Gold Prices.
