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China boosts gold reserves amid global central bank diversification

China has been quietly but consistently increasing its gold reserves while simultaneously reducing its holdings of US Treasuries, a move that has garnered attention from financial experts worldwide. The rationale behind this shift and its potential implications for global markets are subjects of ongoing analysis.

BetaShares Chief Economist David Bassanese noted China’s recent actions, stating, “China seems to be selling treasuries and buying gold, possibly signaling a reduction in support for the bond market.” It’s worth noting, however, that gold prices have not seen a significant uptick since May, which is correlated with the enduring strength of the US economy, rising bond yields, and a stronger US dollar.

Data from the World Gold Council reveals that China purchased 23 tonnes of gold in July, bringing its total net gold acquisitions for 2023 to 126 tonnes. As a result, China’s gold reserves now stand at approximately 2136 tonnes, representing roughly 4 percent of the global gold reserves.

While China’s actions have drawn attention, it is part of a broader trend among central banks worldwide diversifying their holdings of the precious metal. In July, central banks globally collectively acquired a net total of 55 tonnes of gold. Notably, the Central Bank of Uzbekistan and the National Bank of Kazakhstan, two of the largest sellers, decreased their holdings sourced from domestic mining operations.

Despite the significant uptick in central bank gold purchases, David Bassanese downplayed their immediate impact on gold prices. He stated, “I don’t think central bank buying is a major factor for now,” highlighting that gold prices might rally if bond yields reach their peak, and discussions of interest rate cuts gain traction, particularly in an environment where the US dollar weakens.

Traditionally, gold prices tend to move inversely to risk-free investment yields, given that physical gold generates no income for investors and becomes more attractive as a store of value when alternative assets offer lower yields.

In terms of current monetary policies, the US Federal Reserve is anticipated to maintain cash rates between 5 percent and 5.25 percent during its September policy meeting. Meanwhile, US core inflation is projected to rise by 0.2 percent month-on-month in August. However, market sentiment currently places only a 48 percent likelihood of a US interest rate hike by November.

In Australia, economists remain divided regarding the likelihood of the Reserve Bank raising rates above the current 4.1 percent level. Futures markets indicate an implied peak rate of 4.17 percent in February 2024, followed by a gradual easing to an implied rate of 3.94 percent in December 2024.

China’s strategic shift towards increasing its gold reserves while reducing its exposure to US Treasuries underscores an evolving dynamic in global finance. While the precise motivations behind this maneuver remain open to interpretation, it reflects a broader trend of central banks worldwide adjusting their portfolios in response to changing economic conditions and monetary policies. As central banks continue to fine-tune their strategies, the future trajectory of gold prices and its repercussions for financial markets will be closely monitored by experts and investors alike.

As a result of these moves, Macquarie Bank (ASX:MQG) revised its 2024 gold price projections by a 9 percent increase, projecting an average price of $US2019 per ounce, and raised 2025 forecasts by 5 percent to an average of $US1875 per ounce. 

They are also suggesting that investors consider purchasing various ASX-listed gold mining companies, such as Northern Star (ASX:NST), Regis Resources (ASX:RRL), Genesis Minerals (ASX:GMD), and St Barbara (ASX:SBM).

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