Understanding the Reasoning Behind China’s Gold-Buying Strategy

Gold has increased by 13% in the last year, 54% in the last five years, and 407% in the last 20. Tracing this impressive growth beyond its ties to the U.S. dollar can help investors understand the bigger picture. 

For example, when analyzing how different assets perform when priced in gold, traders can view the percentage differentials. If oil were priced in gold, it wouldn’t have increased in the last 50 years. 

The U.S. dollar continues depreciating at such severe rates that understanding gold’s performance in relation to the U.S. dollar’s failure isn’t easy. 

“We are devaluing American money so rapidly that in America today, you can’t even bribe Democrat senators with cash alone. You need to bring gold bars to get the job done just so the bribes hold value,” GOP Rep. Matt Gaetz stated when discussing the bribery allegations against Democratic Sen. Bob Menendez. 

Despite the U.S. dollar depreciation, gold continues to rise in U.S. dollar terms and on a global scale. Over the last decade, gold has increased by 68% against the Chinese yuan, 73% against the UK pound, 80% against Canada’s Loonie, 100% against the Japanese Yen, 133% against the Swedish krona, and 200% against the Brazilian real. 

China is currently the top gold-buying nation in the world. The People’s Bank of China has purchased gold for a consecutive 11 months, increasing its reserves in September by 26 tons, raising its total purchase amount for the year to 181 tons. The nation’s total “self-reported” gold reserves now sit at 2,192 tons.

Some analysts believe China’s total reserve figure may be higher after a couple of years of unreported data from the nation when the central bank may have been buying gold under the table. Following this theory, China would be unlikely to release its total holdings until it successfully secured the top-ranking position across the globe.

Not only is China ravenously buying up all the physical gold it can get its hands on…. more importantly, it is letting the world know it is buying up all the physical gold it can get its hands on [this time],” Vince Lanci explained.

China isn’t the only central bank stockpiling gold right now, though. During mid-2022, a shift occurred where central banks began purchasing gold in bulk. 2022 became the highest gold-buying year for central banks on record. 

Despite investors selling their gold exchange-traded funds in 2022, central banks continued stockpiling gold. The momentum didn’t end as we entered 2023 either. The first quarter of 2023 broke the record for the most gold purchased from central banks during any first quarter, including 2022. 

Now, Eastern nations are facing off to control gold pricing while Western nations continue piling up debt. Central banks keep racing to see which nation can purchase the most gold, and China wants to win this race.

In the most recent weeks, China experienced an extreme surge in local gold prices. China reached record-breaking premiums of over $120 an ounce over international prices. The standard premium over the last decade averaged only around $7 per ounce.

The price surge came from a temporary import restriction in China, which spiked demand with limited supply levels. After lifting the restriction, prices settled a bit, returning to more normal levels. 

China is a hub for gold retail demand. The biggest gold and silver distribution center in the world sits in Shenzhen Shuibei, China, just outside of Hong Kong. Hong Kong contains over 7,000 gold stores with daily turnover rates of nearly $40 million.

Hong Kong’s gold retail sales contribute to nearly 50% of the nation’s total gold sales. China and India both see gold as a culturally significant symbol of wealth and luck, vital for numerous holiday celebrations, weddings, and more.

In November, India celebrates Diwali, the top gold-buying festival of the year. China celebrates the Lunar New Year in February with extravagant purchases, dances, and colorful activities. India’s Hindu wedding season runs from October through December, then January through March, where families celebrate their loved ones with gold gifts and lavish purchases. 

In 2022, China imported 1,343 tons of gold. The same trend seems to be occurring this year as we approach the holiday season. The nation must meet its high consumer demand levels while following its own political strategies of devaluing the U.S. dollar.

Gold plays a critical role in China’s culture and it happens to be the key asset in the globe’s new strategy of moving away from the U.S. dollar toward something more secure. With these two factors combined, China continues forging new highs in central bank gold buying.

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