State Administration of Foreign Exchange data shows China increased gold bullion holdings by 8.09 tons in April. April represents the sixth straight month China increased its gold holdings. Over the last six months, China's official gold holdings rose by about 128.09 tons. The official stockpile is 2,076 tons, but experts debate whether it is trustworthy.
Like several central banks, China prefers anonymity and rarely reports gold purchases. According to the Gold Council, 75% of central banks purchased gold anonymously in 2022. China reported buying gold in 2019 and 2016. However, analysts have speculated for decades about the totality of China's actual holdings. China is the largest gold producer and is notorious for manipulating economic data. Most industry experts believe the number is significantly higher than China officially reports.
Bloomberg reported in 2013 that Russia was the primary buyer of gold over the previous decade, and China was the second largest buyer. The article contains a quote from a Russian lawmaker and ally of Putin, Evgeny Fedorov. “The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the Dollar, The Euro, the Pound, or any other reserve currency,” Fedorov said.
China is not the only country heeding Russia’s instructions to hold physical gold to counterbalance the Dollar’s risks. The Gold Council released its Gold Demand Trends report for Q1 2023. Central banks have been buying record amounts of gold bullion for nine straight months. Central bank demand was less than in the previous two quarters but still well above average. The report stated, "Central banks have continued to surprise to the upside. The net buying rate in Q1 sets the tone for a higher midpoint for our full-year estimate…although we maintain that this year is very unlikely to match 2022 [sic]." (Gold Council data lags before publication, so data was accurate as of 3/31/23).
The gold council expects investment and central bank buying to drive prices higher this year but decrease demand for jewelry and fabrication. “We continue to see a healthy upside for investment this year, while the picture for fabrication (jewelry and technology) is more muted. Further robust central bank buying is expected, albeit below 2022's record.” Central bank demand is up 176% from a year ago, but retail investor demand for sovereign coins like the Gold American Eagle and Gold American Buffalo is up 14%. Retail investors are moving slower than the central banks, which is probably a massive mistake.
What do they know?
In January, I wrote my opinion about China buying so much gold. Russia’s behavior over the last decade sheds enormous light on China's gold-buying behavior. My analysis is that China buying gold is preparation for war, a component of a plan to overthrow the Dollar’s international hegemony, and insurance against possible sanctions. Verifiable facts support each of those claims, and each is a solid argument to own physical gold. However, the central bank's behavior should be a louder wake-up call than China’s consistent lying about economic data points.
Central banks know the economic landscape by setting interest rates and policies. If the global economy is a giant ship, then the central banks are at the wheel, and their policies are the rutters guiding the boat. Suppose you are on a large vessel and see the captain firmly brace himself: what would you do? Would you brace yourself immediately or wait to see what's next? It is safe to say the captain knows the direction he (or she) is planning to turn.
If the captain braces his weight one way or the other, mimicking his posture is probably a good idea. He knows what's next and has seen many patches of rough water. The captain knows when to brace and when the movement will be underwhelming. Central banks are not only bracing but bracing at unprecedented levels. The only possible explanation for nine straight months of record gold buying is the captain thinks it is about to hit the roughest waters ever and doesn’t want to get thrown overboard.
The decision to buy gold is straightforward. It is a decision about long-term value. If the Dollar is less valuable and loses purchasing power over time, gold is a good decision because the price will increase. Gold is a bad idea if the Dollar will gain purchasing power as the years go by because the price will go lower. Actions speak louder than words, and central banks are trading record amounts of their reserve dollars (saving accounts) for gold. The central bankers decided gold would be a better value store than the Dollar. Do you know something about the Dollar’s future that central bankers don’t?
You may want to brace for impact with a healthy portfolio allocation in precious metals.
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