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China’s economy is in a slump, and purchases of gold as a safe-haven asset have surged.
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Central banks have been buying up gold, contributing to record high spot gold prices.
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Other central banks are also buying gold to diversify their assets as the dollar strengthens.
With China’s economy in turmoil and people rushing to buy gold as a safe-haven asset to hedge against economic uncertainty, precious metal prices have hit record highs.
The country’s central bank also got in on the act, adding 60,000 troy ounces of gold to its vaults in April, according to official data released on Tuesday. This is the 18th consecutive month that the People’s Bank of China has increased its gold reserves.
But it’s not just economic uncertainty. The increased interest in gold is also a reaction to the strong dollar, which has made imports of goods too expensive for emerging countries like China.
The U.S. dollar index, which measures the value of green against a basket of six other currencies, has risen 4% this year and 10% since the beginning of 2022. This is because of the Federal Reserve’s first rate hike since March 2022. That tends to make the dollar stronger.
The Chinese yuan has depreciated by 1.6% against the dollar since the beginning of the year. It has fallen 4% over the past 12 months and has fallen about 12% against the dollar so far in 2022.
Other central banks are also accumulating gold. The World Gold Council said in a report last week that large gold buyers include China, Turkey and India.
“Both years accounted for nearly a quarter of annual gold demand, and many believe that central banks’ continued voracious demand for gold has been compounded by seemingly difficult circumstances, namely rising yields and the U.S. dollar. “We believe this is a key driver of recent performance in the face of high levels of decline,” the council wrote.
Global central banks purchased a total of 290 tonnes of gold in the first quarter of this year, the highest ever for the start of the year, the WGC said.
Central banks haven’t finished buying gold
The central bank has been buying large amounts of gold since 2022, but may not be done yet, the WGC said.
“The long-standing trend of central bank gold purchases not only holds firm but also continues to be dominated by emerging market banks,” the WGC added.
Emerging market central banks that bought gold in the first quarter of this year include Kazakhstan, Oman, Kyrgyzstan and Poland.
There are also political incentives for central banks to diversify their assets.
Analysts at J.P. Morgan write, “If countries that are not allied with the U.S. recognize the risk of leaving their foreign exchange reserves vulnerable to sanctions and begin to consider draining their foreign exchange reserves from the dollar. “It has become clear that there is,” JPMorgan analysts wrote. This is the March report.
They added that governments aligned with the US are also adding gold to protect against higher and more volatile inflation globally.
The rush to gold assets may not bode well for the US dollar in the long run if the currency continues to appreciate.
Economists at the international financial services firm Allianz said in a report last June that “a stronger US dollar will weaken its role as a reserve currency.” “If access to US dollars becomes more expensive, borrowers will look for alternatives.”
Spot gold prices are currently around $2,330 an ounce, below the all-time high of over $2,400 an ounce reached in April.
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