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In the first quarter of the year alone, China reached record purchases, with an accumulated total of 2.063 tons. China's Central Bank had been accumulating reserves since November 2022, to the point where it became the largest buyer of gold in the world.
The price of gold plummeted on the stock market! For the first time in 18 months, the Central Bank of China did not acquire gold in May, which had a negative impact on the price of the precious metal, which fell 2,7%, reaching approximately US$2.311 per ounce.
Since November 2022, China has been accumulating reserves, surpassing other central banks, such as India, becoming the largest buyer of gold in the world.
China stockpiling gold
Chinese acquisitions reached records during the first quarter of the year, with an accumulated total of 2.063 tons
“My initial impression is that China, a key driver of last year's gold rally, is not done buying gold,” said Ole Hansen, head of Commodity Strategy at Saxo Bank. According to Hansen, the pause indicates a resistance to paying record prices.
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According to the World Gold Council, Chinese acquisitions reached records during the first quarter of the year. And, at the end of May, the accumulated total was 72,80 million troy ounces (2.063 tons).
For Nicholas Frappell, global head of Institutional Markets at ABC Refinery, the initial price reaction “seems a little technical”. “It would be surprising if the announcement represented more than a pause in the general trend of current demand from the official sector,” he added.
Although the fifth month of the year saw no change in China's gold balance sheet, recent demand has been driven by the country's need to diversify its reserves and protect itself against the devaluation of its currency.
Why did China increase its gold reserves and what does this have to do with interest rates in the US?
There are two main reasons: the growing concern about US interest rates and debt, which has already reached US$34 trillion, in addition to the risk of economic sanctions due to geopolitical uncertainties. This is the analysis of Gilberto Cardoso, CEO of Tarraco Commodities and member of the Brasil Export Forum.
“China is concerned about the level of American debt. So it adopts a two-pronged strategy: increasing its physical gold reserves and selling US Treasury bonds. It seeks a physical asset that offers protection against inflation while reducing its exposure to US debt securities. American debt and interest have entered a dangerous spiral and China wants to protect itself. It’s a matter of risk diversification,” she explains.
Furthermore, Cardoso highlights that the Chinese fear new economic sanctions that could harm their growth. “China faces the risk of economic sanctions. The dollar has become an American weapon, a financial instrument, and this worries China. All BRIC countries are trying to reduce their dependence on the dollar,” he adds.
There is also a simpler reason for diversification. “China is one of the countries that invests the most in dollars. It is natural that it seeks to diversify into other currencies, including its own, the Yuan. Investing in gold is a natural choice for a country so exposed to the dollar. It is never wise to put all your eggs in one basket. Diversification is essential when investing”, says Paulo Roberto Feldmann, postgraduate professor in international economics at the Faculty of Administration, Economics and Accounting at the University of São Paulo (FEA-USP).
According to Feldmann, gold tends to appreciate in value during economic crises. “On the other hand, the value of gold could fall sharply. In the long term, it is not such a safe investment. Therefore, investing in gold is delicate. It is necessary to choose the moment well and be sure that there will be a crisis that devalues currencies and oil, causing people to seek refuge in gold. But this is rare. I would not recommend investing in gold, as you need to be very attentive to what could happen in the short term”, he concludes.
It's not just China...
Russia and the USA also keep a large part of their reserves in gold. As it is a safe and politically neutral asset, it offers protection against inflation, sanctions and even seizures, as pointed out by Gita Gopinath, deputy director of the IMF, during an event in Stanford.
“The percentage of gold in the Chinese bloc’s foreign exchange reserves has been increasing since 2015 – a trend that is not unique to China and Russia. It is important to note that during the same period, the share of gold in the foreign exchange reserves of the US bloc countries remained globally stable,” explains Gopinath.
The trend among central banks, according to an IMF study, indicates that the purchase of gold is motivated by concerns about the risk of economic sanctions. “Foreign exchange reserve managers tend to increase their gold holdings to hedge against economic and geopolitical uncertainty, including the risk of sanctions.”
…and the future?
For Cardoso, there is another motivation on the Chinese horizon for increasing gold reserves. He suggests looking to the past to understand the future. The Bretton Woods Agreement, signed in 1944 between the winning countries of the Second World War, established rules for the international monetary system. One of these rules was the ban on backing currency in gold, suspended in 1971 by US President Richard Nixon. What does this have to do with China now?
“In the future, China plans to have a gold-backed digital currency. This is a return to the pre-post-war period. She fears that the American monetary base will lose control due to debt, resulting in unprecedented global inflation. As it wants to maintain control of its currency and deindex it from the dollar, China makes up its reserves with physical gold. It buys gold on the international market and stores it. It is a store of value that is not lost over time”, observes Cardoso.
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