Why Is China stacking Gold?

China is piling up gold.

Why?

The mainstream is starting to ask this question, and it seems to have a pretty good grasp of the answer.

On Sunday, CNBC ran an article highlighting record Chinese gold imports and hit the nail on the head.

“That buying spree reflects Beijing’s push to cut its dependence on the dollar.”

China’s gold buying reflects a broader global de-dollarization trend.

The People’s Bank of China has reported an increase in its official gold reserves for 23 straight months, with a 23-tonne addition to its official gold holdings in September. This follows 20-tonne purchases in July and August.

Year-to-date, the People’s Bank of China has reported 80 additional tonnes added to its gold holdings.

And the Chinese have bought a lot more gold than that.

China is among the central banks likely holding significantly more gold than publicly disclosed. As Jan Nieuwenhuijs reported, the People's Bank of China is secretly buying large amounts of gold off the books. According to data parsed by the renowned Money Metals researcher, the Chinese central bank currently sits on more than 5,000 tonnes of monetary gold in Beijing – more than TWICE what Chinese officials publicly admit.

Central bank gold buying coupled with investor interest pushed Chinese gold imports to their highest level in more than a decade.

Why is China stacking Gold?

Growing global wariness of the U.S. dollar is no secret. It rests on two broad concerns – one economic and one geopolitical.

The ever-increasing U.S. debt, with no sign the government has any intention of rolling back the spending

The weaponization of the dollar as a foreign policy tool.

Julius Baer Group analyst Carsten Menke characterized China’s gold accumulation as “political,” telling CNBC it’s being driven by “the weaponization of the U.S. dollar and the related desire to be less dependent on U.S. Treasuries as a reserve asset.”

In fact, even as the Chinese central bank has expanded its gold holdings, it has also shed U.S. Treasuries. The People’s Bank of China’s U.S. debt holdings have collapsed to the lowest level since 2008.

China isn’t alone. Central banks have been accumulating gold at a frenetic pace for several years. It took off in the wake of aggressive Western sanctions imposed on Russia after it invaded Ukraine. The U.S. and its allies effectively locked Russia out of the dollar-dominated global financial system. Other countries saw the writing on the wall. Foreign leaders reasoned that if the U.S. can use dollars to collapse the Russian economy, it can collapse theirs as well.

If you’re worried somebody can pull the dollar rug out from under you, what do you do? You get the rug out of the room.

CNBC summed it up this way.

“Western governments froze Russia’s central bank assets after its 2022 invasion of Ukraine, underscoring how foreign-held reserves can be restricted at times of geopolitical friction, while gold in a country’s own vaults remains insulated.”

In other words, gold comes with little counterparty risk. You control the gold you hold. There is no party on the other side of the transaction to renege or interfere.

Russia has used its extensive gold reserves to prop up its economy during the war.

Why does Chinese Gold buying matter?

You might be thinking, ‘Who cares what the Chinese do?”

Well, if the Chinese are dumping dollars and the rest of the world follows their lead, it will eventually become your problem.

And keep in mind, this isn’t just about China. Some historical U.S. allies, including Canada, have suggested the world needs to rely a little less on the greenback.

Here’s the rub: if the de-dollarization trend continues, it spells big trouble for the U.S. – even if the dollar maintains its reserve status.

During a CNBC interview last month, Treasury Secretary Scott Bessent declared, “Dollar dominance is essential.”

He went on to insist, “I think we should not be shy about flexing where we have advantages … and push back on those who are not aligned with us.”

But Bessent may be overstating his case. Yes. Dollar dominance is essential for the U.S. For the rest of the world – not so much.

Simply put, the United States depends on the global demand for dollars to underpin its bloated government. De-dollarization threatens an inflation tsunami as those unwanted dollars make their way back to the U.S.

The dollar’s role as the world's reserve currency is the only reason the U.S. can borrow, spend, and run massive budget deficits to the extent it does. It creates a built-in global demand for dollars and dollar-denominated assets. This absorbs the Federal Reserve’s money creation and helps maintain dollar strength despite the Federal Reserve’s inflationary policies.

But what happens if that demand drops?

A de-dollarization of the world economy could cause a dollar glut. The U.S. currency could further depreciate. At the extreme, global de-dollarization could spark a currency crisis. You and I would feel the impact through higher price inflation, eating away at the dollar's purchasing power. In the worst-case scenario, it could lead to hyperinflation.

Meanwhile, Chinese gold buying supports the global gold market even as Western investors sell the yellow metal due to the anticipation of higher interest rates.

ING Bank commodities strategist Ewa Manthey told CNBC that Chinese buying is “an important source of structural support for gold prices,” noting that central banks are far less price sensitive than retail investors.