In recent months, the price of gold has shot up. One of the main reasons: China’s central bank is stocking up on the precious metal. What’s behind it?
China is driving up the price of gold. A brilliant rally began last fall, and in April the precious metal was more expensive than ever before at more than $2,400 per troy ounce. The price has now fallen back somewhat. But gold has still increased in price by almost 12 percent since the beginning of the year. The increase since last autumn: 40 percent – fueled primarily by demand from China. Private individuals, funds and the Central Bank of the People’s Republic are buying gold in record quantities.
Demand in China is not the only reason for the rapid increase. Traditional reasons also play a role: gold is considered a safe haven in times of geopolitical crises – currently including the Russian war of aggression in Ukraine and the war in the Gaza Strip. The interest rate cuts promised by the US Federal Reserve since the beginning of the year have also driven up the price of gold. The interest-free precious metal, which is often used as a hedge against inflation and currency devaluation, is becoming more attractive.
But at the moment it looks as if the price of gold is not primarily determined by economic factors, but primarily by demand from China. In recent weeks, the price of gold has even increased, even though the Fed had signaled that it would lower interest rates later than expected. And the dollar-traded precious metal continued to be heavily bought, even though the dollar has risen against almost all of the world’s major currencies, making the commodity more expensive.
In the past 17 months – starting in November 2022 – China’s central bank has continually increased its gold reserves. In the past two years it has bought more gold than any other central bank in the world. The reason: Like other emerging countries, China wants to make its foreign exchange reserves less dependent on the dollar, the world’s reserve currency. After the attack on Ukraine, the USA took far-reaching measures to exclude the Russian state and the country’s companies from the international financial system. Even Russia’s dollar reserves were frozen.
Against this background, China’s central bank is not only buying more gold, but is also selling US government bonds. According to the financial news agency Bloomberg, the People’s Republic held such securities with a volume of around $775 billion in March. Before the Russian attack it was still 1.1 trillion dollars. Nevertheless, according to the World Gold Council, the precious metal currently only accounts for 4.6 percent of China’s reserves. To put it into perspective: In India the proportion is almost twice as high, in Germany it is around 70 percent.
But not only the Central Bank of the People’s Republic is stocking up on gold, private investors are also buying. This is because alternative investments are not very attractive. On the one hand, the real estate market, into which most families have invested their savings, is in a serious crisis. On the other hand, things have been going badly on the domestic stock market for a long time. And because of the People’s Republic’s capital controls, Chinese private investors cannot easily expand into foreign markets.
According to the New York Times, China’s total gold purchases in 2023 were nine percent above the previous year’s level. In the first quarter of 2024 it was at least six percent. In view of the boom, Chinese hedge funds have now also gotten involved. Despite the rally, they still clearly see room for improvement.