Why China is on a gold buying spree
Sat April 13 2024
As gold prices break the $2,300 mark for the first time, driven by geopolitical tensions and the anticipation of US interest rate cuts, China's significant role in the metal's demand has come under the spotlight. The People's Bank of China (PBC) has been at the forefront, purchasing gold for 17 consecutive months, making it the most aggressive central bank buyer in 2023.
This move is part of a broader strategy by China and other emerging market central banks to bolster their gold holdings.
A hedging strategy
Gold is traditionally viewed as a safe haven during times of economic and
political turmoil. Recent conflicts in the Middle East and Ukraine, along with
post-Covid inflation spikes, have contributed to gold's appeal. China's
purchasing spree is seen as a hedge against currency devaluation, especially as
the yuan and the Chinese stock market face pressures from the country's
economic challenges.
Why is China accumulating gold?
China's reliance on the US dollar for international trade has led to concerns over its vulnerability to the greenback's fluctuations. As the world's reserve currency, the dollar dominates global commerce, but Beijing is keen on diversifying its foreign exchange reserves to reduce dependence on it. China's dollar holdings have decreased significantly since 2011, a trend that has accelerated post-pandemic. The shift towards gold aligns with the objectives of the
BRICS nations (Brazil, Russia, India, China, and South Africa), who are contemplating a shared currency to challenge the dollar's supremacy by 2050.
Dollar's diplomatic leverage
The US's ability to weaponize the dollar, using it to impose sanctions and maintain its geopolitical stance, has raised concerns among BRICS countries, particularly in China and Russia. The sanctions against Russia following its invasion of Ukraine and the exclusion of Russian banks from the SWIFT system exemplify the dollar's power.
"I think it [the sanctions] has made a lot of central banks think carefully
about what they hold in their reserves," John Reade, chief market
strategist at the World Gold Council, told Bloomberg.
China fears similar measures could be employed against it due to its military
ambitions and the ongoing trade tensions with the US. This apprehension has
driven China's push to diversify its reserves, with gold playing a key role in
this strategy.
China's long-term diversification goal
Despite nearly 18 months of continuous gold purchases, China's gold reserves
still represent a small fraction of the PBC's total reserves, well below the
levels held by central banks in developed countries. The World Gold
Council expects central bank purchases, led by China, to persist for several years, underscoring a commitment to diversification.
While some analysts caution that gold prices may be inflated by speculators,
the metal's intrinsic value, derived from its rarity and utility in various
industries, underscores its appeal. China's strategic accumulation of gold
reflects not only an effort to safeguard its economy but also a challenge to the current global financial order dominated by the US dollar.
Source: https://timesofindia.indiatimes.com/