China (and the Brics) challenge the US dollar and focus on gold

8 May 2024 - 13:00

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Through the accumulation of gold, China, and more generally the Brics countries, are trying to continue the slow path towards de-dollarization.

China (and the Brics) challenge the US dollar and focus on gold

If it’s not a gold fever, we’re close. In China, a country that alone represents about a fifth of global sales of gold, something peculiar is taking place. Or at least something new compared to the recent past.

Yes, because if until a few years ago it was usually older people who grabbed gold (mostly middle-aged women eager to buy large bracelets or add something to their savings), today the shops in the Asian giant witnessed a large number of young people, often in their twenties, interested in "golden negotiations" previously unknown or almost unknown to them.

In recent days, meanwhile, the price of gold has exceeded the level of 2,300 dollars for the first time. According to analysts, the reason would depend on a mix of three factors: geopolitical issues, expectations of a cut in US interest rates, and, indeed, the accumulation of gold by China.

Xiaohongshu, a well-known Chinese social platform popular among members of the so-called Generation Z, is full of talk about gold. Furthermore, according to what was reported by the Economist, young people in the People’s Republic of China do not have much spare money. The youth unemployment rate is around 15%, and many companies are cutting salaries. Young people are therefore trying to make the most of their little savings by pouring into the aforementioned gold.

China’s Gold Rush

The context is not rosy at all. Yes, because traditional investments are not going in the best way at all - the stock market is in sharp decline while house prices have collapsed for ten consecutive months - and so young people would have decided to participate in the gold rush.“Since the beginning of the year, we have seen huge retail purchases by the Chinese. A record amount of buying on the Shanghai Gold Exchange,” John Reade, chief market strategist at the World Gold Council, told Bloomberg TV.

Another important reason useful to explain the increase in demand for the precious metal beyond the Wall coincides with the latest moves by the Chinese central bank. The People’s Bank of China (PBC) has in fact purchased gold to diversify its holdings away from dollars, in the midst of growing tensions with the United States.

According to the World Gold Council, PBC has dramatically increased its gold reserves for the last 16 consecutive months. In 2023, it would have bought more gold than all other central banks. Estimates speak of a quantity equal to approximately 225 tons, or a quarter of the 1,037 tons purchased by all the central banks in the world. Krishan Gopaul, senior EMEA analyst at the World Gold Council, noted that PBC increased its gold reserves by 22 tonnes in January and February alone. Now the Chinese central bank would hold approximately 2,257 tons of gold in its deposits.

Gold, the dollar and international tensions

As DW explained, China is heavily dependent on the dollar for trade with the rest of the world. As the planet’s reserve currency, most commodities are priced in dollars, and more than half of the world’s trade occurs through the use of the greenback.

Over the past 30 years, as it rose to challenge US economic dominance, China has accumulated huge foreign exchange reserves, mostly in dollars, but the Asian giant now fears it has become too dependent on US currency. Beijing is therefore diversifying the PBC’s reserves by also relying on gold, pursuing the same objective as other countries in the Brics group (whose economies are destined to dominate the global economy by 2050).

The dollar’s position allows Washington to borrow money at a much lower cost, as well as use the currency as a diplomacy tool (for example to impose sanctions. For more information ask Russia, Iran and Korea North).

Alongside a trend that reflects a socio-economic crisis - the purchase of gold by young people to seek security in a complex moment - we must therefore also consider a geopolitical aspect. In short: through the accumulation of gold, China, and more generally the Brics countries, are trying to continue on the slow path towards dedollarization. Who knows, perhaps the move should also be interpreted from a military perspective, in an implicit Chinese attempt to prevent the effect of any economic sanctions.

Original article published on Italy 2024-05-07 06:47:00. Original title: La Cina (e i Brics) sfidano il dollaro Usa puntando sull’oro

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