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China Buys More Gold as It Seeks to Minimize Exposure to the Dollar

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China bought gold for the fourth straight month in March, adding another 11.2 tons of the yellow metal to its reserves, according to the latest data released by the People’s Bank of China.

With the most recent purchases, the Chinese official gold reserves stand at about 1,884 tons or 60.62 million ounces. The Chinese have been adding gold to their reserves over the last several months as they continue to minimize exposure to the US dollar.

In December, the People’s Bank of China announced the first increase in its gold holding since 2016. 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 the International Monetary Fund’s benchmark currency basket.

Since then, the Chinese aren’t only 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.

In a recent note, Lawrieongold.com creator Lawrie Williams said China is one of several countries seeking to minimize dependence on the greenback.

One suspects China is like Russia, and probably some other nations too, in diversifying its reserves away from dependence on the US dollar as a reserve currency. The US has been demonstrating its readiness to use the dollar, and its links to global trade, as a weapon to try and bring enemies and allies into line with its global foreign policy.”

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.

Last month, 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.”

Analysts at Bank of America Merrill Lynch said this trend toward global US dollar deleveraging could help boost gold prices.

We believe that de-dollarization could also lead to rising share of gold holdings in gold portfolios.”

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.

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