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China’s economy is struggling, leading to increased purchases of gold as a safe haven.
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Central banks are going on a gold buying spree, helping to drive gold spot prices to record highs.
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Other central banks are also grabbing gold to diversify their assets thanks to the strength of the greenback.
The Chinese economy is in bad shape and people are rush to buy gold as a safe haven to protect against economic uncertainties, propelling prices of the precious metal to record levels.
The country’s central bank also took action by adding 60,000 troy ounces of gold to its reserve in April, according to official data released Tuesday. It was the 18th consecutive month that the People’s Bank of China purchased gold.
But it’s not just about economic uncertainty. Increased interest in gold is also a drag on the strength of the U.S. dollar, making it too expensive for emerging countries like China to import goods.
THE Dollar Index — which measures the value of green against a basket of six other currencies — has increased 4% this year and 10% since the start of 2022. This is due to interest rate hikes by the Federal Reserve since March 2022, which tend to strengthen. the dollar.
The Chinese yuan has lost 1.6% against the dollar this year. It is down 4% over the past 12 months and around 12% against the greenback since the start of 2022.
Other central banks are also stocking up on gold. The main buyers of gold are China, Turkey and India. World Gold Council, or WGC, wrote in a report last week.
“Accounting for almost a quarter of annual gold demand over those two years, many have attributed central banks’ voracious appetite for gold as a key factor in its recent performance in the face of seemingly challenging conditions: namely higher yields and the strength of the US dollar. ” the council wrote.
In total, the world’s central banks bought 290 tonnes of gold in the first quarter of this year – the strongest start to a year on record, according to the WGC.
Central banks have not finished buying gold
Even though central banks have bought a lot of gold since 2022, it may not be done yet, the WGC said.
“Not only is the long-standing trend of central bank gold purchases firmly intact, but it also continues to be dominated by emerging market banks,” 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 also political motivations for central banks to diversify their assets.
“It has become evident that in some cases, countries that are not allied with the United States have begun to seek to reduce the composition of their reserves away from the dollar, as they perceive the risks of keeping these reserves vulnerable to sanctions “, J.P. Morgan » analysts wrote in a March report.
U.S.-aligned governments are also adding gold to protect against higher and more volatile global inflation, JPMorgan analysts added.
The rush into gold assets may not bode well for the US dollar in the long term, if the currency continues to appreciate.
“A stronger dollar would weaken its role as a reserve currency,” write economists at Allianz, an international financial services company, in a report on June 29. “If access to the dollar becomes more expensive, borrowers will look for alternatives.”
THE gold spot price is now around $2,330 per ounce, down from its record high of over $2,400 per ounce in April.
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