After two years of keeping its gold reserves static, the Chinese government has begun ramping up its gold purchases in recent months. Its gold-buying binge has entered a third straight month, with another 10 tons of metal added in February to its official reserves. It’s worth noting, however, that it’s widely assumed that China under-reports its official reserves in order not to telegraph its actual position.
The timing of this latest round of gold purchases couldn’t be more auspicious, coming as it is during the midst of trade negotiations with the US. It could very well be a signal that China is pessimistic about the outcome of negotiations and is looking to shore up its reserves ahead of the inevitable breakdown of the talks. And it is certainly an indicator that China is attempting to diversify its reserves away from the dollar and dollar-denominated assets and into tangible assets that will maintain their value regardless of what the US government decides to do.
China is also under an immense amount of pressure with regard to its monetary policy, as the US continually threatens to name China as a currency manipulator. With China alternately facing pressure to refrain from manipulating the yuan’s value while also being pressured to keep the yuan from weakening against the dollar, upping its gold reserves may be a way for the Chinese government to do what many have figured it might do eventually: introduce a gold-backed yuan.
That type of step would still be a long ways off but it wouldn’t be inconceivable. Gold plays the same role for governments as it does for individual investors, acting as a store of value and a hedge against risk. Especially when the risk of the federal government issuing trillions of dollars worth of debt over the coming decade and the Federal Reserve monetizing much of that debt remains elevated, it makes sense that the Chinese government would seek to diversify into gold and away from Treasury debt. Investors should think about doing the same, harnessing gold’s ability to protect their investment portfolios against financial turmoil.
This article was originally posted on Goldco.
