China is wise to boost its gold reserves as a weaker US dollar looms and currency wars beckon
- China’s central bank is piling into gold, the traditional safe haven, as bond yields go negative and the US considers ditching its ‘strong dollar’ mantra, potentially igniting currency wars
China added more gold to its foreign reserves in June, for the seventh month in succession.
Nor is China the only sovereign buyer of gold.
“Over the past decade, central banks have purchased more than 4,300 tonnes of gold, taking their total holdings to around 34,000 tonnes today,” Strauss-Kahn added.
“The trend has continued in 2019, with net purchases reaching 90 tonnes before the end of the first quarter.”
Admittedly, for central banks to diversify their reserves to include more gold has its own merits and is not necessarily a judgment on immediate gold price prospects.
Central bank purchases of gold are no guarantee that gold prices will rise but they indicate to the wider investing community the underlying and potentially price-supportive demand for the precious metal.
Also, historically, a rise in international tensions has proven somewhat supportive of the gold price, and there is certainly no shortage of that at the moment.
As gold generates no interest, any decision to add more gold to an investment portfolio should factor in both the costs of holding such a position and the opportunity cost of returns that could be earned elsewhere, for example from government bonds.
In a number of jurisdictions, benchmark interest rates are negative. Yields on government bonds have fallen along the curve. In Japan and Switzerland, 10-year government bonds carry a negative yield.
“You don’t have to wait until things get so bad to have a dramatic series of rate cuts,” US Federal Reserve vice-chairman Richard Clarida said on the Fox Business Network last Thursday.
The prospect of lower US interest rates might itself enhance the attraction of gold compared to the US dollar, the world’s predominant reserve currency.
The “as of now” caveat caught the market’s eye, as it indicated that the Trump administration could yet choose to move away from the currency position Rubin crafted in 1995. To do so would be risky business, and, some might say, playing with fire.
If markets decide that the Trump administration’s commitment to the strong dollar is under review, investors are likely to sell the US dollar hard, including versus gold.
China has been buying gold for seven months in succession. That makes a lot of sense.
Neal Kimberley is a commentator on macroeconomics and financial markets