The Critical Importance Of Physical Gold In The Era Of Global Dedollarization

Frank Balm May 9, 23

EDITOR'S NOTE: In the face of worldwide dedollarization and increasing uncertainty surrounding the US dollar, China's enduring appetite for gold sends a clear message: owning physical gold is more crucial now than ever. The People's Bank of China, after six consecutive months of gold purchases, has upped its gold reserves to 2,076.50 tonnes, constituting approximately 4% of its total foreign reserves. Despite a recent slowdown in buying, the trend towards gold shows no sign of reversal. This global shift away from the US dollar, predicted to span years, continues to strengthen the long-term support for gold prices. With China and other central banks steadily accumulating gold irrespective of its price, the importance of gold as an asset that retains value in the face of rising inflation is being underscored. As countries like China, Russia, and Singapore amass gold to bolster their international standing and hedge against economic uncertainty, it's time for individuals to recognize the invaluable insurance policy that is physical gold.

(Kitco News) - After a solid start in the first quarter, China's central bank has once again demonstrated its appetite for gold. And while the demand is slowing, it is not going away.

Updated reserve information from the People's Bank of China shows that it bought 8.1 tonnes of gold last month, its sixth consecutive month of purchase. According to the data, China's gold reserves now total 2,076.50 tonnes, representing roughly 4% of total foreign reserves.

So far, in this new buying cycle, China's central bank has bought more than 128 tonnes of gold. However, April's purchase does mark a slowdown in the buying frenzy. In March, the central bank bought 18 tonnes of gold.

China's latest update on its gold reserves comes after the Word Gold Council said that central banks bought 228.4 tonnes of gold between January and March, a record for first-quarter demand.

China's slowdown in April also reflects the broader marketplace. Central bank demand increased by 178% from the first quarter of 2022. Still, it was down significantly compared to activity reported in last year's third and fourth quarters.

"We continue to expect central banks to be net buyers of gold overall this year. But it is important to understand that our forecasts do not expect the same level of buying last year, in part because of the sheer number," said Juan Carlos Artigas, Head of Research for the WGC, in an interview with Kitco News.

Although China's and other central bank gold demand appears to be slowing, analysts don't expect the trend to reverse anytime soon.

In a recent interview with Kitco News, George Milling-Stanley, chief gold market strategist at State Street Global Advisors, said the global deleveraging away from the U.S. dollar will take years. He added that this trend will continue to provide long-term support for gold prices.

"Central banks are dangerously overexposed to the U.S. dollar and dangerously underexposed to gold, and this is why they will be steady buyers of gold, and this has nothing to do with the price at all," he said.

Looking specifically at China's gold reserves, officially, it currently has the seventh largest gold hoard in the world, behind Russia, which holds 2,326.50 tonnes of gold.

However, China's gold holdings represent slightly less than 4% of its total reserves, well below most developed countries. Japan, while it only holds 846 tonnes of gold, the precious metal represents 4.3% of its total foreign exchange holdings.

Singapore, which has also been on a shopping spree this year, holds 222.4 tonnes of gold, representing 4.4% of its total foreign reserves.

Some analysts have said that while there is no magic number for China's gold reserves, it does have to be higher if the country wants to build the yuan's international standing.

Looking beyond geopolitical issues, driving the current de-dollarization trend, Paul Wong, market strategist at Sprott Asset Management, said that he expects central banks to continue to be net gold buyers for the foreseeable future as the world economy faces higher inflation.

"If you want your reserves to retain their value, gold is an attractive asset," he said.

While China has been busy buying gold, Krishan Gopaul, senior analyst at the WGC, noted that the Central Bank of Uzbekistan sold 1.6 tonnes of gold last month. He said that so far this year, the country has sold 16.2 tonnes, bringing gold reserves down to 379.8 tonnes.

The latest data from the Central Bank of Uzbekistan shows a 1.6 tonne decline in its official #gold reserves in April. YTD net sales total 16.2 tonnes, leaving total gold reserves at 379.8 tonnes. pic.twitter.com/Rb263HHEZk

— Krishan Gopaul (@KrishanGopaul) May 8, 2023