Why has the People's Bank of China (PBOC) been continuously purchasing gold for nine months? Why do we respond to the US debt crisis by hoarding gold?
The central bank has been increasing its gold reserves for nine consecutive months.
According to the latest data from the central bank, as of the end of July, China's total gold reserves amounted to 2,136.5 tons, which is an increase of 23.02 tons compared to the previous month. This marks the ninth consecutive month that China has been increasing its gold holdings, breaking the historical record for such an increase.
Looking at the timeline over the past few years, since the beginning of 2022, the PBOC has been making significant purchases of gold on the international market and storing it in the national treasury, thereby increasing China's gold reserves.
Why does the PBOC keep increasing its gold holdings?
The value preservation and appreciation properties of gold are an important basis for our decision to increase gold holdings, but this is just one aspect.
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Firstly, gold does indeed have the ability to preserve and appreciate value.
As a universal equivalent, gold possesses the ability to maintain and increase its value, which is very important for a country. In recent years, with the deterioration of Sino-American relations, especially since Russia began to face sanctions from the United States in 2022, it has seen almost half of its foreign exchange reserves frozen by the US, causing significant losses to the Russian central bank.
Russia's $300 billion in foreign exchange reserves were frozen.
Russia discovered that its foreign exchange reserves were frozen, and the dollars and euros in its bank accounts became unusable paper, which meant that dollars and euros were not safe in Russia's hands. If it were not for Russia's previous experiences with multiple sanctions and the strategic reserve of a large amount of gold, the ruble would have significantly depreciated.So, we can see that when a country is in a relatively dangerous state, especially when it is under sanctions from the United States and the European Union, the so-called "international currencies" like the US dollar and the euro are not safe. The US and the EU can simply click a mouse to freeze hundreds of billions of dollars of your funds.
The dollar hegemony means that the United States can freeze any country's dollar reserves at any time.
And how much resources, labor, and time do the Russians have to pay to earn this huge amount of foreign exchange reserves? So this is a paradox of modern currency.
Some people say that the dollar is "waste paper," and in fact, it is for the Russians. They would rather have the yuan than the dollar. Russia's national sovereign wealth fund has even cleared the dollar's share, leaving half for the yuan.
For China, since 2018, with the continuous and escalating China-US trade war, the relationship between China and the United States has gradually become tense and is getting worse. According to international experts' analysis, if China and the United States can maintain the current situation without deterioration, it is already a blessing. If it is more extreme, then consider the possibility of a small-scale hot war conflict between China and the United States.
The China-US game continues to escalate!
With Russia's experience as a lesson, we can clearly judge that if the situation between China and the United States deteriorates, then the United States' "decoupling and breaking the chain" with China, as well as blocking China's finance, will make China's dollar reserves become waste paper and make China's holdings of more than 800 billion US dollars in US debt completely zero.
In the past, we thought that Americans had a bottom line in doing things and would not do things like clearing US debt, after all, this seriously damaged the credibility of the dollar and the United States. However, from Russia's experience this time, we can see that sometimes the United States really has no principles in doing things.
We cannot measure the United States with China's diplomatic means and moral standards, after all, the history of the United States is very short, and sometimes it really does not know what is courtesy and shame.
Therefore, under the possibility and threat of the deterioration of China-US relations, we need not only the value preservation and appreciation ability of gold but also its ability to resist risks.China continues to sell off U.S. debt, with $22.2 billion worth sold in May alone. This is because while countries around the world may not recognize the U.S. dollar, they will not deny the value of gold. Gold, as a universal equivalent, is absolutely accepted everywhere in the world. Although it is not as convenient as modern currencies in terms of exchange and use, its risk resistance is definitely more reliable than currencies like the euro and the U.S. dollar, which could potentially become "worthless paper." This is the reason why the People's Bank of China is purchasing gold.
China urgently needs gold to improve its foreign exchange reserve system. As the world's second-largest economy, we have a substantial amount of foreign exchange reserves, primarily earned through our full industrial chain and international trade. Previously, to facilitate foreign exchange settlements and international trade, we needed a large amount of foreign exchange reserves to support the value of the renminbi, leading us to purchase nearly $1 trillion in U.S. debt.
By the end of 2021, we still held $1.0687 trillion in U.S. Treasury bonds. (Currently, it is $860 billion) However, since 2018, the contradictions between China and the U.S. have escalated, and relations have become increasingly tense. The strategy of holding a large amount of U.S. debt for the convenience of doing business has become outdated.
What we need to do is gradually buy gold and convert a significant portion of China's foreign exchange reserves into gold, thus avoiding the fate of Russia.
So, is China's foreign exchange reserve safe? It used to be, but now it is not. This is because the proportion of gold in our foreign exchange reserves is very low.
According to the People's Bank of China's "Official Reserve Assets" document, in July 2023, China had 68.69 million ounces of gold, valued at $135.36 billion, an increase of nearly $10 billion in gold reserves compared to January.
Nevertheless, compared to China's total foreign exchange reserves of $3.2043 trillion, the proportion of gold in the foreign exchange reserves is only about 4.2%.What about the United States? It possesses a staggering 8,133 tons of gold, which accounts for 73.5% of its foreign exchange reserves. The majority of European countries also have a significant portion of their foreign exchange reserves in gold, with many holding over 50%.
Therefore, the amount of gold that China currently holds is not too much, but rather, far too little. For the security of our strategic reserves, it is imperative that we purchase more gold to cope with the complex international situation and ensure the safety of China's foreign exchange reserves.
In recent years, with the gradual collapse of the dollar's hegemony, the Federal Reserve's interest rate hike cycle, and a series of events such as the United States' indiscriminate issuance of paper money and the U.S. debt ceiling crisis, central banks, including China's, have come to perceive the dollar as increasingly unreliable and U.S. Treasury bonds as less dependable. Gold, on the other hand, offers a greater sense of security.
The U.S. debt ceiling crisis has triggered a "de-dollarization wave" globally. As a result, many countries that once stored their gold in the United States' underground vaults (for ease of delivery) have repatriated their gold to their own central banks. This shift occurred because, during a time when the United States enjoyed a good reputation, it was natural that they would not tamper with their gold.
However, with the increasing likelihood of the dollar becoming worthless, storing one's gold in the United States is no longer perceived as "safe." To mitigate risks, countries have been demanding that the United States return the gold stored in its vaults to their respective nations.
In summary, why has China been increasing its gold holdings for nine consecutive months? On one hand, it is for the preservation and appreciation of national wealth. But more importantly, it is to address the complex and ever-changing Sino-American relations and to safeguard the nation's economic and strategic currency security.
Coincidentally, the United States has experienced a series of upheavals and changes. Amidst frequent U.S. debt crises, aggressive interest rate hikes by the Federal Reserve, and the outbreak of a banking crisis in the United States, a global de-dollarization trend has emerged.
The People's Bank of China can seize this opportunity to expand its gold reserves, effectively diversify risks, and achieve preservation and appreciation. This will prevent the hard-earned money of the Chinese people from being frozen by the United States, as happened to Russia, ensuring that the savings of the Chinese people do not vanish overnight.Of course, we must also recognize that the People's Bank of China does not have a large amount of gold, and it accounts for a small proportion of foreign exchange reserves. However, as we continue to buy more and more, we will gradually accumulate more gold to cope with potential risks and ensure the economic security of China.
Gold will also replace U.S. Treasury bonds and become the ballast and trump card for China's economy in the new era!