Central bank gold demand continues soaring as we progress into the second half of 2023, with China forging the race. August marked the tenth consecutive net purchase month from China’s central bank as the nation moves away from the U.S. dollar. With this rise in de-dollarization, China has now chopped its Treasury holdings down to a 14-year low, the lowest level seen since 2009.
In August, China purchased 29 tons of gold, raising its total reserves to 2,165 tons. After the ten-month buying streak, the nation now sits in the number-two position for the top gold-buying nation for 2023’s second quarter, just behind Poland. During Q2 of 2023, Poland purchased 48.41 tons of gold, and China came just behind with 45.1 tons added to reserves.
Poland began its gold-buying streak back in June when the nation began stockpiling gold to prepare for “the most unfavorable circumstances.” Based on statements made by the national bank’s president, Adam Glapinski, back in 2021, some predict that the nation will stockpile 100 tons of gold before concluding its buying spree.
“Why does the central bank own gold? Because gold will retain its value even when someone cuts off the power to the global financial system,” Glapinski explained back in 2021. “Of course, we do not assume that this will happen. But as the saying goes — forewarned is always insured. And the central bank is required to be prepared for even the most unfavorable circumstances. That is why we see a special place for gold in our foreign exchange management process.”
China’s reasoning is a bit more complex.
The nation hopes to devalue the U.S. dollar in an attempt to reduce its prominence in global trade and investments. As the world’s most prominent currency, this is a large undertaking, though many central banks are jumping on the same trend. By buying gold, nations around the globe are reducing their reliance on the U.S. dollar.
In June, China cut its Treasury holdings to a 14-year low. China isn’t alone in its efforts, though.
According to the World Gold Council, 62% of central banks plan on increasing their percentage of gold reserves within the next five years. Last year, the same survey only yielded a response of 42%.
“The rationale to increase gold holdings, therefore, comes as no surprise since ‘interest rate levels,’ ‘inflation concerns,’ and ‘geopolitical risks’ continue to be the leading factors in central bankers’ reserve management decisions as they were last year,” the World Gold Council noted.
Numerous nations continue stockpiling gold and enacting policies to reduce their reliance on the U.S. dollar.
For example, oil has been priced in dollars for decades; however, a shift recently occurred. Russia, which accounts for 10% of oil production, Venezuela, and a few other oil-producing nations stopped accepting the U.S. dollar to divert money away from it while strengthening other nations. The oil-producing nations are now predominantly trading with the Chinese yuan instead.
More nations around the globe want to take away the U.S. dollar’s strength so developing economies can gain more power.
“The dollar’s reserve status is a privilege that gives the U.S. significant political, economic, and market influence,” Skylar Montgomery of GlobalData TS Lombard explained.
“That weaponization of the dollar is part of the reason why Russia, China, and other BRICS nations have vied for an alternative to the dollar,” Montgomery continued.
The concept of de-dollarization may seem sound in theory, but it’s yet to play out in practice. The U.S. dollar continues to thrive, reaching record highs and an unprecedented high in SWIFT payments of 46% in July. The U.S. dollar index is currently up over 1.5% year-to-date.
Whether de-dollarization will truly pan out in the next few years, as predicted by some, is still unclear, though we do know that many nations will continue trying, and their efforts will likely continue involving gold. Gold is an integral asset in the de-dollarization trend, as it helps nations fill their reserves with something stable, universal, and inflation-proof. As countries like China move away from the dollar, gold can reap the rewards.
Until then, some BRICS nations (Brazil, Russia, India, China, and South Africa) have mentioned ideas of creating a common currency that could challenge the U.S. dollar. Considering the rise in gold reserves, it’s not unreasonable to think that a gold-backed currency would be a suitable option here. If that were the case, gold would gain excellent strength and demand levels.
As always, investors should consult their financial advisors before making any portfolio decisions.