China has reportedly increased its holdings of gold by 75 percent over the past sixth years. The country is now the sixth largest holder of gold in the world. According to reports, the supply that was recently purchased took place through its State Administration of Foreign Exchange (SAFE). By buying gold this way, China was able to exclude the purchases from the monetary reserve figures that it officially reported. This situation leads one to question why China is buying gold in such large supply.
Some people believe that at the time China began buying this gold six years ago, the country was predicting that the U.S. would destroy the dollar due to the war in Iraq. China recently transferred its gold holdings from the SAFE books to the People’s Bank of China (PBOC). This caused the gold acquisitions to officially be reflected in the country’s monetary reserve numbers. Many believe that this is part of a more global effort aimed at revisiting gold as a monetary reserve asset.
Some analysts think that China may be the world’s largest consistent buyer of the precious metal. The country is not up front about these purchases because it is also one of the largest U.S. Treasury note holders. If China announces its acquisitions on a regular basis, that may cause gold prices to rise even higher. It could also devalue the dollar, which would devalue China’s U.S. government bond portfolio.
China has been reported to purchase gold from domestic mines at below-market prices and not report the transactions. Some believe that this practice will continue into the near future. Prior to the London G20 Summit in April 2009, the Governor of the PBOC wanted to discuss the replacement of the U.S. dollar with another form of reserve currency issued by financial institutions in other countries.
It remains to be seen whether China will continue to purchase government bonds as the value of its cash reserves declines. The country is in a difficult position because a failure of the U.S. economy will be very detrimental to China. In the meantime, China may continue purchasing gold to hedge its exposure to the situation with the dollar, or the country may have other plans for all that precious metal.