Commentary
After taking a six-month break from an 18-month gold-buying spree, the People’s Bank of China (PBOC) resumed its policy of large gold purchases in November.
On Oct. 31, gold reached a record price of $2,790.15 an ounce. Although it fell 5 percent last month, it remains about 28 percent higher for the year.
What’s behind China’s gold fever?
Gold Value Fluctuations Don’t Matter to Beijing
Although the value of the PBOC’s gold portfolio is subject to fluctuating market prices, China’s central bank seems to be more concerned about acquiring as much gold as it can and less concerned about changing valuations. In fact, according to Bloomberg, by the end of August of this year, the PBOC’s gold holdings reached 2,165 tons or about 4 percent of its total foreign reserves. Not surprisingly, in 2023, China led the world’s financial institutions in gold acquisitions and may do so in 2025.Domestic Demand: A Partial Cause of China’s Gold Fever
There are several explanations for why Beijing is pursuing a bold gold policy. Certainly, gold has long been a safe haven for investors, especially during economic uncertainty. Currently, several economic factors are projecting uncertainty worldwide, including in China, which is driving demand. The ongoing property sector meltdown, an unreliable stock market, lower consumer spending, missed GDP growth targets, and the falling value of the yuan are just a few—and the people know this.What’s more, there aren’t many good places for the Chinese to invest at home, and capital controls make it difficult for most Chinese to take advantage of foreign opportunities. Given gold’s history as a reliable store of value, it’s attractive to all levels of investors, resulting in rising domestic demand. For all these reasons, the PBOC is seeking to meet the Chinese public’s demand for gold.
Global Events Drive Uncertainty
But Beijing’s gold-forward strategy involves more than simply meeting domestic demand. Conflicts in Ukraine and the Middle East, including the evolving situation in Syria, have led to a far less predictable international order. Today, the world is leaning more toward uncertainty than predictability, which typically leads to a rise in the demand for gold.This has undoubtedly been a factor in driving gold prices higher, but it hasn’t had much impact on China’s acquisition plans, which have been in place for the past several years.
The Strategic Elements of Gold Acquisition
Global instability aside, the strategic goal behind Beijing’s gold policy is, at minimum, to reduce its reliance on the U.S. dollar. That would include protecting itself as much as possible from the punitive measures—such as trade sanctions, restrictions, and tariffs—that Washington often imposes upon its economic or geopolitical adversaries. Both China and Russia have been and are subject to sanctions and tariffs by the United States.
Even though the U.S. dollar’s prominence in the world has diminished in recent years, 64 percent of global debt, 54 percent of world trade, and about 59 percent of global foreign currency reserves are denominated in U.S. dollars—the nearest competitor is the euro, at 20 percent.
The Chinese Communist Party (CCP) is correct to assume that more punitive economic policies from Washington will negatively affect China. These concerns have become especially acute, with President-elect Donald Trump set to return to the White House in January 2025. Trump has pledged to raise tariffs on Chinese goods and services and even add sanctions based on China’s behavior on trade and other factors.
A Gold-Backed Yuan to Compete With the Dollar?
However, Trump isn’t the key factor in Beijing’s gold policy. The CCP’s long-term strategy is to replace the United States as a global hegemon. To do so, it must replace the dollar with the yuan, regardless of who occupies the White House. China’s gold acquisitions play a major role in that ambitious plan. The thinking is that a gold-backed yuan would eventually make it more desirable than it is today.That’s precisely why Beijing steadily replaced its U.S. dollar Treasury bond holdings with gold well before the 2024 election cycle. Shrinking China’s U.S. bond portfolio is the other half of Beijing’s dollar replacement strategy. Selling large amounts of bonds may lower market demand and encourage other nations to do the same.
To put it in perspective, in early 2022, China’s U.S. Treasury bond portfolio exceeded $1 trillion. By May 2024, it had decreased to $768.30 billion. That trend is likely to continue. At some point, China hopes that it will be able to shore up the value of the yuan to at least compete with the dollar on the world stage.
A Gold-Backed BRICS Currency to Counter Trump’s Policies?
As China continues to acquire gold, it accelerates its plan for de-dollarization. As a founding member of the BRICS (Brazil, Russia, India, China, and South Africa) currency, China is the largest economic power in the group, which is significant. The BRICS currency agreement was formed to compete with the dollar in international trade via bilateral trade agreements between members that excluded the use of the dollar.With the recent expansion of the BRICS group (BRICS-Plus), which now includes Iran, Egypt, Ethiopia, and the United Arab Emirates (UAE), their combined economies exceed 50 percent of the world’s GDP. Saudi Arabia received an invitation to join BRICS but has not yet formally done so. By contrast, the U.S. economy is about 27 percent of global GDP. What’s more, the total gold holdings of BRICS-Plus members is nearly 17 percent of all the gold in central banks worldwide. It’s also worth noting that along with China, Russia and India have also been steadily adding to their gold reserves over the years.
Clearly, the decision to expand BRICS membership gives the group much more influence globally, with greater advantages in economic power, gold reserves, market reach, and others.
Is it not reasonable to speculate that a gold-backed BRICS-Plus currency may be introduced to the world before too long—perhaps even as a response to the incoming Trump administration?
If there’s a better explanation for China’s massive appetite for gold, what might it be?
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
