In a recent survey conducted by Invesco, a global asset management company, it has been revealed that an increasing number of countries are taking steps to repatriate their gold reserves, Reuters reports.
The motive behind this strategic move is to shield themselves from the kind of sanctions imposed by the West on Russia. The findings shed light on the changing dynamics of gold storage strategies in the face of geopolitical tensions and the potential risks of economic penalties.
According to the Invesco Global Sovereign Asset Management Study, which collected responses from central banks and sovereign wealth funds, the financial market turmoil witnessed last year has forced sovereign money managers to reassess their investment strategies. This reevaluation comes as a result of concerns over higher inflation rates and the persisting geopolitical uncertainties that have become a characteristic of today's global landscape.
Of the 85 sovereign wealth funds and 57 central banks that participated in the survey, more than 85% anticipate higher inflation in the coming decade compared to the previous one. This outlook has prompted a growing belief that gold and emerging market bonds offer sound investment opportunities in such an environment. However, it is the freezing of almost half of Russia's $640 bn in gold and forex reserves by Western nations in response to the Ukraine conflict that has further fueled the current shift in gold storage practices.
The survey findings reveal that a significant number of central banks have expressed concerns over the precedent set by the freezing of Russian reserves. Approximately 60% of respondents acknowledged that this event has increased the attractiveness of gold as a safe-haven asset. Moreover, 68% of central banks have decided to keep their gold reserves within their own countries, compared to just 50% in 2020.
An unnamed central bank official revealed that their institution has taken the precautionary step of repatriating their gold holdings back to their home country. This move is intended to safeguard their assets and ensure the security of their valuable reserves. This sentiment aligns with the overall trend observed by Rod Ringrow, Head of Official Institutions at Invesco, who stated, "The mantra we have seen in the last year or so is, 'If it's my gold, then I want it in my country.'"
In addition to gold storage concerns, central banks are actively diversifying their portfolios away from the U.S. dollar due to ongoing geopolitical considerations. The survey found that 7% of respondents perceive the rising U.S. debt as a negative factor for the dollar. Nevertheless, the majority of central banks still view the dollar as the world's primary reserve currency, with only 18% considering China's yuan as a potential alternative, down from 29% last year.
Geopolitical tensions were identified as the biggest risk over the next decade by nearly 80% of the surveyed institutions. Additionally, 83% expressed concerns about inflation within the next 12 months. Infrastructure projects, particularly those related to renewable energy generation, were identified as the most attractive asset class.
India has emerged as an attractive investment destination for the second consecutive year, while the "near-shoring" trend, which involves establishing factories closer to consumer markets, has bolstered the appeal of countries like Mexico, Indonesia, and Brazil. Conversely, China, Britain, and Italy were deemed less attractive investment options.
As interest rates rise and work-from-home and online shopping habits ingrained during the COVID-19 outbreak endure, property has become the least desirable private asset class.
Rod Ringrow, Head of Investico's Official Institutions, underscored the significance of wealth funds that performed well last year, attributing their success to their ability to recognize the risks associated with inflated asset prices and their willingness to make substantial portfolio adjustments. Looking ahead, he expects a similar approach from funds and central banks as they navigate the challenges posed by higher inflation, stating, "It's a big sea change."
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