Why doesn’t China – the largest gold producer worldwide – sell its gold externally? Because, as strange as it seems, it prefers to buy it for itself: only last year it purchased some 454.1 tons. If we take into account that China is the sixth largest owner of gold bullion internationally, this means a huge gold investment.
Its investment philosophy may be understood by considering the gold demand and its driving forces. Chinese investors’ hunger for gold assets made the demand for gold bullion bars to rise by a staggering 44%. We shouldn’t wonder then that the domestic gold demand increased by 11.4% in one single year, China accounting thus for 18.7% of the global demand. The consumer gold demand grew also because China allowed its 1.3 billion citizens to own gold: thus, it was of circa 200 tons a year ago. And that’s not the end of the story: the WGC believes that the gold consumption across China will double over the next ten years. However, the government is the main investor in gold and not the private investors or citizens.
Why is that so? Well, both because of the international economic context and of the Chinese economic situation in this very context. By being a massive purchaser of the US debt, China not only has hoarded plenty of dollars, but remains also highly exposed to their likely devaluation, if considering the scope of that debt. On the other hand, most Chinese commodities reach the US market, a fact that also involves the said currency. Therefore, it is only normal for China to protect itself by transforming into gold its trade surplus and counterbalancing the debatable value of its American bonds by the definite value of gold.
Gold seems to be the right answer when you expect currencies, especially the dollar, to fall. The natural reaction of people and governments alike is to turn to gold when facing financial crises. And it’s based on a matter of fact, if you index the gold price to the one in 1900: all you can see is that its value has managed to stay quite stable by comparison with other currencies.
Under these circumstances, China invests in a stable asset, ‘grown’ cheaply enough at home. While by doing this, it may substantially contribute to the increase in the gold demand and price, by hoarding likely to devalue currency it could collapse, remaining without a financial safety net. What would you choose?
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