China officially added gold to its reserves last month for the first time in two years.
Meanwhile, the Chinese have been shrinking their holdings of US Treasuries. According to the Nikkei Asian Review, the moves are intended to reduce dependence on the US dollar.
According to data released by the People’s Bank of China, the country’s gold reserves totaled 1,862 tons at the end of 2018. That represents a 10-ton increase from the previous month and the first rise in the country’s hoard since June 2016.
Chinese holdings of US Treasuries dropped for the fifth straight month in December, sinking to the lowest level since May 2017. Over the past year, the Chinese have shed $50 billion in US debt.
Japanese economist Yusuke Miura told the Asian Review China “probably wants to reduce its dependence on dollar-denominated securities in its foreign-currency reserves.”
The Asian Review said concerns over the possibility of economic sanctions has also motivated the Chinese drive away from the dollar.
The Russians have made similar moves. The country has been rapidly accumulating gold over the last several years. Russian gold reserves increased 224 tons in 2017, marking the third consecutive year of plus-200 ton growth. The Russian central bank was on pace to continue that trend through 2018. And last spring, the Russians sold off nearly all of their US Treasury holdings.
There have also been efforts to limit exposure to the US dollar by setting up alternative payments systems and financial channels that don’t rely on the greenback. The Russians have developed an alternative payment system that has reportedly surpassed SWIFT in popularity within the country. According to the Central Bank of Russia, 416 Russian companies and government organizations had joined the System for Transfer of Financial Messages (SPFS) as of September.
And it’s not just countries that have traditionally rocky relations with the US looking for alternatives. In September 2018, the EU announced plans to develop a special payment channel to circumvent US economic sanctions and facilitate trade with Iran.
Other countries have also been buying gold. According to the World Gold Council, Kazakhstan added another 4.3 tons of gold to its reserves in November. Mongolia has expanded its gold holding by over 10 tons since June. We’ve even seen increases in gold reserves from two EU banks – Hungary and Poland.
Quite simply, gold offers countries some measure of independence from the US dollar. That means more political and economic independence and stability. Gold could even play a key role in a strategy to dethrone the greenback.
The Chinese have a history of going long periods without any official announcement of its gold holding 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 it suddenly went silent again. During this time period, China was pushing for inclusion of the yuan in 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.