China is buying gold like there's no tomorrow, jacking up prices

Often considered a safe investment during times of geopolitical and economic turmoil, gold has soared in price in response to Russia's invasion of Ukraine and the war in Gaza But gold's climb to record highs above $2,400 per ounce has proved more resilient, and lasted longer, because of China. Chinese consumers have flocked to gold as their confidence in investments like real estate or stocks has faltered.At the same time, the country's central bank has steadily added to its gold reserves, while whittling away at its holdings of US debt. And throwing fuel on the fire are Chinese speculators betting there is still room for appreciation.
China already held considerable sway in gold markets. But the country's influence has become more pronounced during this latest bull run - a nearly 50% increase in the global price since late 2022. It continued to scale new heights despite factors that traditionally make gold a comparatively less appealing investment: higher interest rates and a strong US dollar. Last month, gold prices vaulted higher even after the US Federal Reserve signalled that it would keep higher interest rates for longer. And it has continued to appreciate even as the dollar has risen against almost every major currency in the world this year.
Prices have pulled back to around $2,300 per ounce, but there is a growing sentiment that the gold market is governed no longer by economic factors but by the whims of Chinese buyers and investors. "China is unquestionably driving the price of gold," said Ross Norman, CEO of MetalsDaily, a precious-metals information platform based in London. Gold consumption in the country rose 6% in the first quarter from a year earlier, as per China Gold Association. It came on the heels of a 9% rise last year.
Gold investing became more alluring as traditional investments turned lackluster. China's real estate sector remains in crisis. With few better alternatives, money flowed into Chinese funds that traded in gold, and many young people took to collecting beans in tiny quantities as an affordable investment. Another major buyer of gold in China is the country's central bank. In March, the People's Bank of China added to its gold reserves for a 17th straight month. Last year, the bank bought more gold than any other central bank in the world, adding more to its reserves than it had in nearly 50 years. Beijing is buying up gold to diversify its reserve funds and reduce its dependence on USD. China has been reducing its US treasury holdings for more than a decade. As of March, China had about $775 billion worth of US debt, down from about $1.1 trillion in 2021.
When China increased its gold holdings in the past, it bought domestically using yuan, said Guan Tao, global chief economist at BOC International in Beijing. But this time, he said, the bank is using foreign currencies to buy gold - effectively reducing its exposure to the USD and other currencies. Many central banks, including China, started acquiring gold after the US took the rare step of freezing Russia's dollar holdings under sanctions imposed on Moscow. Other US allies have imposed similar curbs.
Although Beijing has been buying up gold, the metal accounts for only 4.6% of China's foreign exchange reserves. In percentage terms, India holds nearly twice as much of its reserves in gold.