10 Jul

Is China Buying Up Gold in a Bid to De-Dollarize?

WRITTEN BY Anuradha Garg

China continues to add to its gold reserves

China continued adding to its gold reserves in June. It added another 10.3 tons of the precious metal to its reserves in the month, marking the seventh consecutive month during which it added to its gold reserves. Through the six months ending in May, the country added ~74 tons to its gold reserves.

The SPDR Gold Shares (GLD) started gaining traction in June. In the month, it gained 8%, outperforming the S&P 500 (SPY), which returned 6.4% during the month. Along with geopolitical tensions, Fed rate cut expectations, physical buying, and the weaker US dollar have been helping gold outperform. The Invesco DB US Dollar Index Bullish ETF (UUP) fell 1.3% in June alone. You can read Gold Breaches $1,400: What’s the Next Stop? for a more detailed discussion of gold’s price drivers.

Amid the ongoing trade war, China is trying to diversify away from the US dollar (UUP). China’s holdings of US Treasuries (TLT) also fell for the second straight month in April to $1.113 trillion, the lowest level in almost two years. The iShares China Large-Cap ETF (FXI) has gained just 3.3% year-to-date amid trade war tensions, which stands in contrast to the 19% gain in the SPDR S&P 500 ETF (SPY). China has evidently been more affected by the trade conflict.

De-dollarization and gold buying

The de-dollarization trend is visible not only in China’s foreign reserves but also in Russia’s. Russia (RSX) has remained a sustained buyer of gold. It bought six tons of gold in May, bringing its total gold reserves to 2,183 tons. In the first five months of the year, it bought 78 tons of gold.

Last week, Poland’s central bank also announced that it had bought 95 tons of gold in June, taking its gold purchases in 2019 to 100 tons. It’s building gold reserves to strengthen its financial security.

Gold-buying by central banks

According to the World Gold Council, in 2018, global central banks purchased 651.5 tons of gold, the second-highest total on record. The central banks of Russia (RSX), Turkey, and Kazakhstan led the pack, accounting for 58% of total central bank demand in 2018, down from 94% in 2017. Russia purchased the most gold on record at 274.3 tons during the year. These purchases were mostly funded by the sale of US Treasuries. Russia is in the process of de-dollarization by selling US Treasuries (AGG) and buying gold instead.

Many analysts have also turned bullish on gold’s price outlook, in part due to increased central bank buying. Goldman Sachs (GS) believes that the countries that have geopolitical tensions with the US are buying gold in large quantities. Standard Chartered’s precious metals analyst, Suki Cooper, is very positive about gold’s price outlook. She believes that one of the major factors helping gold’s rise is the buying of gold by central banks.

A tailwind for gold prices

Central banks’ increasing gold reserves seem to be a good omen for gold prices. Given rising trade tensions and other geopolitical uncertainties, countries—especially China (FXI) and Russia—are expected to keep adding to their gold reserves. It’s also noteworthy that these two countries’ gold reserves as a proportion of their total reserves are still far below the reserves of developed countries such as the US, France, and Italy.

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