China’s gold play a signal of intent

Reports in the international media suggest China is undertaking a significant and sustained purchase of gold.

Many consider this is a signal of China’s intentions relating to Taiwan and, while a valid point, it is also worth exploring the economic merits of such actions, their cause, and their impact.

Bloomberg is among the news agencies to highlight China’s gold-buying activity during the past 18 months, which has increased the total gold reserves of the People’s Bank of China.

China’s struggling economy necessitates consideration of safe-haven purchases. Traditionally, this would include an increased holding in US dollars, long viewed as a stable currency that insulated nations against their own economic or currency challenges.

A strong US dollar has been mentioned as a reason why China has sought to use its US dollar holdings to purchase more gold. This holds true to some degree.

As Huileng Tan observed in Business Insider, the US dollar index – a measure of the US dollar against six other currencies – has risen 4 per cent this year and 10 per cent since the beginning of 2022.

Ms Tan notes this is due to US Federal Reserve interest rate rises since March 2022.

She further cites a JP Morgan report that asserts nations are moving away from US reserves. They perceive risk in holding reserves vulnerable to sanctions.

Furthermore, nations allied to the US are shifting towards gold, as it is considered a wise protectionist play against higher and more volatile global inflation.

A review of the 18-month value of the Chinese yuan relative to the US dollar indicates a spike from November 2022 to June 2023 but a return to the levels of October 2022 from June 2023 to the current day.

It remains true, however, when analysing the five- and 10-year position of yuan to US dollar that the current dollar value would raise questions as to its suitability as the best reserve position for the People’s Bank.

The result is clear for gold prices, which have risen more than 20 per cent since October 2022.

There is also the emergence of BRICS as a potential disruptor to the US dollar as a global reserve currency. BRICS is an alliance between Brazil, Russia, India, China and South Africa.

Russia’s International Monetary Fund representative, Alexey Mozhin, is quoted in Russia media as stating that there are clear weaknesses in the current system, that BRICS offers a viable alternative, and that converting BRICS into a real currency backed by exchange goods is critical to guard against the collapse of the US dollar and the international monetary system.

My reaction to BRICS, and to the comments of Mr Mozhin, involved a high degree of suspicion and doubt. Purely from an economic perspective, it would appear premature to be discussing a BRICS currency when trade agreements need to mature.

Additionally, with several of the member nations struggling to control inflationary pressures (and some with a horrible record of doing so), a centralised currency with independent fiscal and monetary policies would be akin to the challenges plaguing the Euro.

In this case, however, it would be with far less stable economies as the starting point and require collaboration between several autocratic leaders.

The goal is clear, though, and is a consequence of US sanctions being used as a tool of punishment. These sanctions have been necessary, in my opinion, as there is little space between doing nothing and outright conflict.

Sanctions have been a middle ground of sorts, but one that has driven BRICS nations and others to seek methods to move away from dependency on the US dollar for trade and for reserve currency mitigations.

The Taiwan concerns arise from this. It is a long-term attempt by China to remove this currency dependency from the arsenal of the US and its allies. For all the apparent economic reasons, this would be a sensible strategy to pursue from a Russian and Chinese perspective, given their stated military aims.

The invasion of Ukraine has no doubt emphasised the need for these nations to pursue a non-US dollar reserve currency, trading block, and sanctions-resistant economic landscape.

In the absence of effective sanctions, the possibility remains that the US and its allies are left with two broad choices: do nothing or fight. Either option is worrisome and, as such, we must monitor and strategise regarding the selling off of US currency, the purchasing of gold, and the emergence of sanction-evading trading blocks and currencies.

• Kristian Constantinides is general manager of Airflite and was the 2023 recipient of the Minister’s Award for Services to Defence Industry. The opinions expressed are purely his own