The US dollar is so strong that China’s central bank, among others, just keeps loading up on gold

The US dollar is so strong that China’s central bank, among others, just keeps loading up on gold
The US dollar is so strong that China’s central bank, among others, just keeps loading up on gold
  • China’s economy is struggling, leading to a surge in gold purchases as a safe-haven asset.

  • Central banks are on a gold-buying spree, contributing to record-high spot gold prices.

  • Other central banks are also buying gold to diversify their assets on the back of a strong US dollar.

China’s economy is in a funk, and people are rushing out to buy gold as a safe-haven asset to hedge against economic uncertainties, sending prices of the precious metal to record highs.

The country’s central bank has also gotten into the act, adding 60,000 troy ounces of gold to its stash in April, according to official data released Tuesday. It marked the 18th straight month the People’s Bank of China added to its gold reserves.

But it’s not just about economic uncertainty. The heightened interest in gold is also a pushback to the strong US dollar, which is making it too expensive for emerging nations such as China to import goods.

The US Dollar Index — which measures the value of the green against a basket of six other currencies — has risen 4% this year and 10% since the start of 2022. This is because of the Federal Reserve’s interest-rate hikes since March 2022, which tends to strengthen the dollar.

The Chinese yuan has lost 1.6% against the dollar this year to date. It’s down 4% over the past 12 months and about 12% lower against the greenback since the start of 2022.

Other central banks are also loading up on gold. The World Gold Council wrote in a report last week that big gold buyers included China, Turkey, and India.

“Accounting for almost a quarter of annual gold demand in both those years, many have attributed central banks’ ongoing voracious appetite for gold as a key driver of its recent performance in the face of seemingly challenging conditions: namely, higher yields and US dollar strength ,” the council wrote.

In all, the world’s central banks bought 290 tons of gold in the first quarter of this year — the strongest start to any year on record, the WGC said.

Central banks aren’t done buying gold

Even though central banks have bought a whole lot of gold since 2022, they may not be done yet, the WGC said.

“Not only is the long-standing trend in central-bank gold buying firmly intact, it also continues to be dominated by banks from emerging markets,” the WGC added.

Emerging-market central banks that bought gold in the first quarter of the year include Kazakhstan, Oman, Kyrgyzstan, and Poland.

There are political motivations for central banks to diversify their assets, too.

“It has become apparent that in some cases, nations that are not allied with the United States have begun to look to reduce their reserve mix away from dollars, as they perceive the risks of keeping these reserves vulnerable to sanctions,” JPMorgan analysts wrote in a March report.

They added that governments aligned with the US were also adding gold to protect themselves against higher and more-volatile inflation globally.

The rush into gold assets may not bode well for the US dollar in the longer run, should the currency continue to gain.

“A stronger USD would weaken its role as reserve currency,” economists at Allianz, an international financial-services firm, wrote in a report in June last year. “If access to USD becomes more expensive, borrowers will search for alternatives.”

The spot gold price is now about $2,330 an ounce, off its record highs above $2,400 an ounce in April.

Read the original article on Business Insider

 
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