By now most people are aware that one of the major factors behind increasing gold demand around the world is increased demand from governments and central banks. Rather than being net sellers of gold like they were 10-20 years ago, central banks have become net buyers of gold, with demand from central banks increasing to near-record levels over the past couple of years. That trend is showing no signs of decreasing this year, as central banks continue to add to their gold hoards.
Leading the way, not surprisingly, is China. China has become not only the world’s largest gold producer, but also the world’s largest gold consumer. Chinese consumer demand for gold has overtaken India for the top spot, and the Chinese government is not far behind.
The most recent data from the Chinese government indicate that it has increased its monthly purchases of gold by about 50% recently. The past few months saw the Chinese government adding to its stockpiles by 10-11 tonnes per month, but this past month saw China add 16 tonnes of gold. If that trend continues, or even increases, then China could add significantly to its stores over the coming years.
Most analysts assume that China understates both its official gold reserves and its gold purchases, but those numbers are unfortunately all that we can rely on. Even if they’re not 100% accurate, they still indicate that the Chinese government understands the importance of gold and is doing everything it can to build up its gold supply. That has a multifold purpose.
China currently holds significant amounts of US Treasury debt which it wants to diversify away from. It also wants to increase its own gold holdings to shore up its financial position. And with increasing dissatisfaction with the United States and the dollar-based financial system, there’s every reason to believe that China wants to replace the dollar with a gold-backed currency.
That could explain why both China and Russia are buying large amounts of gold. It will take quite a while for either country to catch up to the United States’ level of gold ownership, but at the rate they’re buying gold, within a decade or two we could start seeing a move towards a gold-backed currency to replace the dollar.