China Is Back In The Gold Buying Game (Actually, They Never Left)

China’s State Administration of Foreign Exchange (SAFE) announced on January 7, 2023, that China had added 30 metric tonnes to its official gold reserves in December 2022.

This announcement came on top of a prior announcement that China added 32 metric tonnes in November 2022. That’s a 62 metric tonne increase in just the past few months. This announcement is significant not only because of the size of those increases, but because this is the first time China has announced increases in its official gold reserves since September 2019 over three years ago.

The details are described in this article.  What’s going on?

The first thing to grasp is that China did not simply buy that much gold in the market over the past two months and then report it in a timely way. China had the gold all along and held off the books inside SAFE. This announcement was simply a policy decision to make some accounting entries to allow the gold to be seen on the books instead of hidden off the books.

There is no doubt that China has at least 1,000 metric tonnes of gold held off the books in this manner, perhaps much more. So, the question investors need to ask is not where did China get the gold (they had it all along), but why did China decide to go public with an increase in their holdings at this time?

As with everything in China, the real reasons are hidden, and the public announcements are mostly lies. Still, we can use inferential methods to get at what the Chinese are up to.

This gold announcement comes at a time when there is a growing dollar shortage in China and around the world. The Chinese may simply want to bolster confidence in their reserve position.

There is also a growing movement to move away from dollar reserves because the U.S. has abused financial sanctions to freeze assets including central bank reserves of Russia, Syria, Iran, North Korea, Venezuela, and others. Countries like China, Brazil, and India are moving away from dollars for fear that they will be next on the sanctions list.

Physical gold in secure custody cannot be frozen or seized or digitally banned. It’s just gold and it’s money good in the hands of the holder.

China’s announcement comes just weeks after Russia announced it had doubled the ceiling on permitted gold holdings of its sovereign wealth fund from 20% to 40%. This will create demand for perhaps 100 metric tonnes over the coming year.

If China continues to add 30 metric tonnes or so to its reserves at the same time that Russia is out to buy 100 metric tonnes, it will put a de facto floor under the gold price while supporting the 20% rally in gold prices we’ve seen over the past few months.

Russia and China could be acting in concert to send a message to the world that dollars are yesterday’s news, and gold is the new foundational reserve asset (as it was for centuries prior to 1971). We could be witnessing a critical turning point in the international monetary system. It’s not too late for astute investors to acquire gold if you are not fully allocated already.

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