By John McDonald
The People’s Bank of China (PBOC) has spent the last 10 months stockpiling gold in preparation for an extended trade conflict with the United States.
In what may be the ultimate safe-haven emergency fund, the bank now holds more than 100 tons of the yellow metal in its reserves after adding nearly 6 tons just since the start of September.
Chief market analyst at Markets.com Neil Wilson noted that such a large volume of gold in reserve would also potentially be good for the value of the Chinese yuan. “It’s a reflection of the trade war and uncertainty this has created among the Chinese authorities.
They need to hedge their risks,” he said in a recent interview.
To put this buying activity in perspective, central banks around the world bought about 374 tons of gold total in the first six months of 2019.
PBOC bought about a quarter of that amount just since December 2018, which is when the country began purchasing in large quantities.
Interestingly, that national bank has not historically opted to release information about its gold-buying patterns but began doing so mid-2015.
Prior to that announcement, the PBOC had not updated information about purchasing or accumulation in six years, Bloomberg reported.
“Given strained relations with the U.S., China needs a hedge against its large holdings of the dollar,” said Singapore-based economist Howie Lee.
The analyst added he expects any success China has in becoming a “superpower in its own right,” the more gold it will buy. As long as that trend continues, the value of bullion is likely to continue to climb as well.
With the PBOC and other central banks clearly indicating they are in the market for gold, investor demand at every level is likely to continue.
At present, gold prices are up about 17 percent over the start of the year and rose slightly after the PBOC’s announcement.
China is not the only country dealing with tensions with the United States by buying gold. Russian also has been buying gold for months now, with some sources placing the total volume of the country’s holdings at a value of about $109.5 billion.
Russian president Vladimir Putin made gold a key part of his strategy to break reliance on the U.S. dollar in his country when it became clear the relationship between the U.S. and Russia would remain strained and possibly worsen.
Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said one significant factor in Russia’s decision to invest in gold is Putin’s preference for “politically neutral tools” to “cushion macroeconomic stability” in the country.
“There is a massive substitution of U.S. dollar assets by gold – a strategy which has earned billions of dollars for the Bank of Russia just within several months,” he said.
Despite 42 percent gains in its gold portfolio in the past year, Russia is treating the yellow metal like the safe-haven asset it is, opting to add to gold reserves in order to diversify its holdings in its central bank rather than selling as gold bought relatively cheaply in 2011 rose over the past few years.
Dmitri Dolgin, ING Bank economist, described the move this way: “The central bank is unlikely to have pursued the goal of earning in the process of managing gold reserves.
The buying was rather about diversification of assets.” Given that China holds enormous volumes of U.S. debt, the PBOC may well be buying with diversification in mind as well.
Source: Markets Insider