What's behind China's gold-buying spree?

The price of gold broke the $2,300 (€2,212) level for the first time this week as geopolitical issues, expectations of US interest rate cuts and China's accumulation of the precious metal spurred interest from speculators.

Gold is seen by investors as a safe haven in times of turmoil and a hedge against currency devaluation, so the conflicts in the Middle East and Ukraine have helped the recent price rise, along with the post-COVID inflation spike.

The move by China's central bank, the People's Bank of China (PBC), has been mirrored by other mostly emerging market central banks, who are all keen to up their gold holdings.

DW takes a look at why Beijing has gone on a gold-buying spree.

What exactly has China been doing?

The PBC has been adding to its gold reserves for the past 16 months in a row, according to the World Gold Council. In 2023, the PBC bought more gold than all other central banks.

The industry body calculated China's purchases of the precious metal last year at 225 metric tons, roughly a quarter of the 1,037 tons bought by all the world's central banks.

In January and February alone, the PBC increased its gold reserves by 22 tons, Krishan Gopaul, senior analyst EMEA, at the World Gold Council wrote on X, formerly known as Twitter.

China's central bank now holds roughly 2,257 tons of gold in its vaults.

As well as the PBC, Chinese consumers have been buying gold coins, bars and jewelry, after their real estate investments, the yuan currency and the country's stock market dropped in value due to recent economic woes in the world's second-largest economy.

"From the start of the year, we've seen enormous Chinese retail buying ... record amounts of buying on the domestic Shanghai Gold Exchange," John Reade, chief market strategist at the World Gold Council, told Bloomberg TV last month.

Why is China buying so much gold?

China is heavily reliant on the US dollar for trade with the rest of the world. As the world's reserve currency, most commodities are priced in dollars and more than half the world's trade is conducted using the greenback.

While growing to challenge the US's economic dominance over the past 30 years, China has built up huge foreign exchange reserves, mostly in dollars.

But Beijing fears it has become too reliant on the greenback and is keen to diversify the PBC's reserves.

China has been gradually reducing its holdings, which have gradually fallen by a third since 2011 to around $800 billion, according to US data. The drop has accelerated since the COVID-19 pandemic.

The goal of diversification aligns with those of other countries in the BRICS (Brazil, Russia, India, China and South Africa) group, whose economies are set to dominate the global economy by 2050.

The BRICS have even mooted the idea of a shared currency in the future, which could potentially challenge the dollar as the world's reserve currency. 

Why does China want to diversify from the dollar?

BRICS nations, including China, are concerned about how Washington weaponizes the dollar to preserve its global economic and geopolitical position.

The dollar's position allows the US to borrow money at a much lower cost. Washington can also use the currency as a diplomacy tool, for example when imposing sanctions on Russia, Iran and North Korea.

Following Russia's invasion of Ukraine in February 2022, the US and European Union imposed several rounds of sanctions on Moscow, including freezing the Russian central bank's foreign reserves.

Under US pressure, most Russian banks were also ejected from the SWIFT payment system, which facilitates international money transfers.

"I think it [the sanctions] has made a lot of central banks think carefully about what they hold in their reserves," Reade told Bloomberg last month.

Chinese leaders are worried that the country could face similar US curbs if it decided to further flex its military muscles or if the trade war with Washington worsened.

Chinese President Xi Jinping has said that his country could retake Taiwan, a democratically run island Bejing considers its own territory, by force if necessary.

The World Gold Council analyst expects central bank purchases to continue for several years, a signal that the diversification is far from over.

Even after nearly 18 months of buying, China's gold reserves account for roughly 4% of the PBC's total reserves. That figure is well below the reserve threshold by the central banks of developed countries.

Having said that, many gold analysts think the price has been overinflated by speculators and that continued demand by central banks like China's may not spur prices much higher.

Even so, unlike paper currencies, gold has intrinsic value as it is a rare commodity that is difficult to extract. It also has multiple economic uses, in electronics, dentistry, medical tools, and the defense, aerospace, and automotive sectors.

Edited by: Rob Mudge