China’s Gold Buying Trends

China’s Gold Buying Trends

Sub: Eco

Sec: External sector

Introduction

• China has the largest foreign currency reserves globally, at $3.22 trillion as of June 2023.
• Despite this, gold’s share in China’s reserves is at a record high of 4.9%, still below the global average of 16%.

Reasons for Gold Buying

• Safety: Gold reserves are safe from seizure as they can be stored onshore.
• Diversification: Amidst geopolitical tensions and sanctions (e.g., Russia-Ukraine conflict), China aims to diversify away from U.S. dollar-denominated assets.

Historical Context

• The People’s Bank of China (PBOC) resumed gold purchases in November 2022 after a three-year pause.
• This resumed buying helped drive global gold prices to record highs in 2024.

Current Trends

• China paused its gold purchases in May and June 2024, attributed to high gold prices.
• Despite the pause, China’s gold buying is expected to continue due to its low gold reserve share relative to its economic size and ongoing geopolitical risks.

Comparisons and Motivations

• Russia, with 30% of its reserves in gold, serves as a cautionary example for China. Western sanctions froze about half of Russia’s reserves, highlighting the security of holding gold.
• Analysts believe China’s motivation includes reducing dependence on the U.S. dollar and mitigating risks of potential U.S. sanctions.

Future Prospects

• If China increases its gold reserves to match the global average, significant additional purchases would be required.
• Continued geopolitical tensions between China and the U.S. are likely to sustain China’s gold buying strategy.

Impact on Markets

• PBOC’s gold buying has a notable influence on global gold prices.
• Increased demand from both official and retail sectors in China supports gold as a secure investment.

Strategic Considerations

• As China looks to bolster its economic security through increased gold reserves, it faces the challenge of balancing purchase volumes with market prices.
• The strategic shift towards gold aligns with China’s broader goal of economic resilience and reduced exposure to U.S.-dominated financial systems.