China added gold to its reserves for the fifth straight month in April and is buying gold at an accelerating pace.
According to the latest numbers released by the People’s Bank of China, the central bank added 14.9 tons of gold to its hoard in April. That raises total official Chinese gold reserves to 1909.4 tons or 61.1 million ounces.
China has been adding gold to its reserves over the last several months as it continues efforts to minimize its exposure to the US dollar.
April’s addition of 14.9 tons of gold was the largest since the People’s Bank of China started buying gold again last winter.
In December 2018, the central bank announced the first addition of gold to its reserves since 2016. The Chinese have a history of going long periods without officially adding gold to its stores and then suddenly revealing a large increase in its reserves. In 2009, the People’s Bank of China stopped reporting its gold holdings. Then in June 2015, the Chinese central bank suddenly announced its gold hoard had grown by 57%.
For a little more than a year, the PBOC regularly announced additions to its gold reserves. Chinese gold holdings rose another 185 tons over the next 16 months before the bank suddenly went silent again.
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During the last gold-buying spree, China was pushing for the inclusion of the yuan in the International Monetary Fund’s benchmark currency basket.
Many analysts believe China holds far more gold than it officially reveals. As Jim Rickards pointed out on Mises Daily back in 2015, many people speculate that China keeps several thousand tons of gold “off the books” in a separate entity called the State Administration for Foreign Exchange (SAFE). Given the political dynamics and the ongoing trade war, it seems unlikely the Chinese suddenly stopped increasing their gold reserves in 2016.
Not only are the Chinese buying gold again; they have also been selling off US Treasury holdings. Over the past year, the Chinese have shed more than $50 billion in US debt.
These moves are widely seen as an effort to minimize exposure to the US dollar and are part of a broader global trend. A number of central banks, including Russia, have been aggressively adding gold to their reserves. Central bank gold purchases hit a level not seen since 2008 through the first two months of this year, totaling 90 tons. Central banks continued their gold-buying binge in March.
Like China, Russia has been endeavoring to reduce its exposure to the dollar over the last several years by buying gold and selling US Treasurys. Russian gold reserves increased 274.3 tons in 2018, marking the fourth consecutive year of plus-200 ton growth. And in the spring of 2018, the Russians sold off nearly all of its US Treasury holdings. According to Bank of America analysts, the amount of US dollars in Russian reserves fell from 46% to 22% in 2018.
When central bankers in countries like China and Russia talk about diversification, they really mean de-dollarization. Given the US government’s history of weaponizing the dollar, its no wonder countries with less than ideal relations with the US are buying gold.
The fact that the global system facilitating financial transactions uses the dollar gives the US a great deal of economic leverage. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) enables financial institutions to send and receive information about financial transactions in a secure, standardized environment. Since the dollar is the world reserve currency, SWIFT facilitates the international dollar system.
In 2014 and 2015, the US blocked several Russian banks from SWIFT as relations between the two countries deteriorated. Last fall, the US threatened to lock China out of the dollar system if it didn’t follow UN sanctions on North Korea.
In March, Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times that China wants to minimize its exposure to the US dollar.
“Since the start of the China-US trade dispute, China has realized that there are risks in holding the US dollar, and it is taking action to increase holdings of other financial assets such as gold to replace its US dollar-denominated assets to guard against those risks.”
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