Despite gold prices reaching historic highs, China has been steadily purchasing gold, drawing attention to the reasons behind this trend.
Historically, gold was considered the most crucial safe-haven asset. Unlike the current trend of investing in virtual assets, gold physically exists, preventing it from disappearing overnight and making it a significant asset to protect wealth.
In case of war, gold can be liquidated at any time, and there’s no risk of it being stolen through hacking. Therefore, the demand for gold has always increased whenever a risk arises worldwide.
As geopolitical risks both domestically and internationally escalate, the demand for gold has reportedly been rising.
As a result, gold prices have been soaring, with governments worldwide leading the charge in gold purchases.
The demand for gold has significantly increased due to the war between Israel and Hamas essentially expanding into a military conflict between Iran and Israel. During the period when Iran attacked Israel, gold prices crossed the $2,400 mark for the first time.
The market has forecasted that gold prices will continue to rise in the future.
Citibank, a global investment bank, predicted that the price of gold will surpass $2,500 per troy ounce by the end of the year. It also predicted that the price of gold would rise 25% from the current level to $3,000 within 6-18 months.
Furthermore, Citibank pointed out that “despite the recent rise in the value of the U.S. dollar, the price of gold is still rising.”
The continuous rise in gold prices is an unusual phenomenon as it coincides with the increase in the value of the dollar. This is speculated to be due to the massive gold purchases by central banks worldwide, including China.
Typically, gold is traded in dollars, so when the dollar strengthens, gold prices fall, and vice versa.
However, as central banks worldwide have started buying gold, gold prices are rising along with the value of the dollar.
The amount of gold purchased by central banks last year was 1,037t, the second-highest amount after 1,082t two years ago, and the top five countries’ central banks’ gold purchases accounted for a whopping 87.5% of the total.
One major reason why China is buying gold is reportedly to prepare for an invasion of Taiwan. This is because if China invades Taiwan, there is a high chance that the West will freeze China’s foreign exchange reserves, as they did with Russia during the Ukraine crisis.
Therefore, it is believed that China is stockpiling gold to mitigate the impact of international sanctions and strengthen its international political position.
The People’s Bank of China has been confirmed to be the largest buyer of gold. Currently, China is selling off U.S. Treasury bonds and buying a large amount of gold, which is believed to be the main reason why gold prices have surpassed $2,400 per troy ounce, a record high.
The World Gold Council (WGC) reported that the People’s Bank of China purchased 225 tons last year, which is about a fifth of the total purchases. The Chinese government has been buying large amounts of gold for 17 consecutive months, and some speculate that China is spending at least $1 billion a month on gold purchases. China’s current gold holdings are estimated to be around 72.74 million troy ounces or about 2,262 tons. As China produces gold domestically, its actual gold holdings are likely to be higher. The fact that China is selling U.S. Treasury bonds can be interpreted as the Chinese government’s intention to reduce its dependence on the dollar. Economic experts in China believe that the Chinese government is increasing its gold purchases due to concerns about potential economic sanctions from the U.S. in response to the Ukraine situation. This is seen as a lesson learned from Russia’s invasion of Ukraine, with Beijing preparing for a potential confrontation with the U.S.
Meanwhile, the Chinese government plans to implement a Food Security Law in June to strengthen domestic grain production and diversify imports in preparation for an invasion of Taiwan. This is seen as an effort to produce wheat and rice self-sufficiently by suppressing the import of corn and other grains used for animal feed.
Currently, China imports grain from the U.S., indicating this is an effort by China to reduce its dependence on U.S. food in case of a months-long or years-long confrontation with the U.S.
Economic experts analyze that China’s efforts toward self-sufficiency in the agricultural sector since last year, in addition to stockpiling gold, indicate its determination to handle both food and finance independently in the long-term confrontation that an invasion of Taiwan could bring.
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