China’s gold rush: its effects on us

China’s gold buys, the limp US$ and conflicts mean gold is “hot”.

By Tony Coleman, Director, New Zealand Gold Merchants

The People’s Bank of China has led other central banks in steadily converting much of their cash holdings into gold bullion – a trend which has ramifications for the world.

Overall, China’s central bank gold purchases totalled 1037 tonnes in 2023 and it has continued accumulating gold into 2024, giving itself an official hoard of around 2265 tonnes.

The drivers of this gold-buying trend are fiscal and geopolitical. Many commentators suggest we are seeing the real start of de-dollarisation, a move away from the US dollar being the world’s dominant currency.

The US has, since the pandemic years, massively expanded its currency. National debt now totals US$34.6 trillion, which means the US Treasury has to borrow more money to pay it back. China used to be a major buyer of US debt but has been selling down its US bonds in recent years. There’s so much US debt floating around that many countries are looking to diversify out of US assets.

There’s a real risk that the US is entering a period of stagflation – much as it did in the 1970s when high interest rates, low productivity and high unemployment plagued the country. Adding to the picture, we have growing geopolitical tensions across the world.

In early May, Germany’s Chancellor, Olaf Scholz, said he was willing to commit 35,000 troops to defend “every square foot” of NATO territory should Russia attack an alliance member. The Israeli military offensive on the ground in Gaza may be reaching its end stage, but the Middle East in general remains a powder keg.

In the East, China continues to expand its military and attempt to shore up its domestic economy in what geopolitical strategists point to as signs President Xi is preparing for war with Taiwan.

Washington has floated the possibility of placing more tariffs on Chinese goods such as electric vehicles to prevent them flooding the market. Everywhere you look, the future is increasingly uncertain. We will likely see more skirmishes between nations, if not outright ‘hot’ wars.

This is when gold increases in value, as it has in recent years and throughout history. Since Covid-19, gold owners have enjoyed annual gains of 12-15 per cent, increasing to 20-25 per cent more recently.

In the past 20 years, Gold performed exceptionally rising 547%, this compares well against NZX 50 rising 585% and the average house price rising 300% over the same period. Property and equities rely on low interest rates to deliver a substantial return – and we are now in a high-interest rate environment.

Gold is a performer in uncertain times, rising 60 per cent since Covid 19 in 2020, while the NZX50 and property are both flat. As uncertainties continue, we anticipate this trend will also continue.

High-growth equities can outstrip returns from gold, but it’s all a matter of being able to pick the right time to invest. Cryptocurrencies are in the midst of a bull run once again, but the debut of Bitcoin exchange-traded funds (ETFs) will ultimately tie the blockchain-based digital currency even more tightly to the cyclical fortunes of corporate America. Volatility in the crypto space remains a turn-off for many.

I’ve been surprised at the extent of gold’s increase in value in recent months. While the price action has tailed off, the increased global demand for gold suggests analysts’ price targets of around US$2700 per ounce of gold for 2025 isn’t unrealistic.

BRICS look for an alternative

The big thing to watch is when the so-called BRICS nations, including Brazil, Russia, India, China, South Africa, as well as new members Saudi Arabia, Egypt, the United Arab Emirates, Iran, and Ethiopia, progress plans for their own currency.

They are looking at developing an alternative currency to the US dollar they can use to trade and invest with each other, underpinned by gold. It would allow them to use blockchain-based digital money to make transfers and settle in gold.

Driving the move is a desire for self-determination, to free themselves from the shackles of western financial domination. But BRICS countries also remember the unprecedented seizure of Russian assets (US$600bn) and its exclusion from the SWIFT financial system as part of Western sanctions following the invasion of Ukraine.

Other BRICS countries, which represent around 3.5 billion people between them, see non-US aligned nations having more autonomy to exchange value as a bloc, insulating themselves from the reach of US foreign policy in the process.

Gold comes into its own

It all suggests a more divided, less trusting world. That’s an environment where gold comes into its own. This asset class makes up just 0.5 per cent of overall investments in New Zealand but is literally the safe money for uncertain times.

Most analysts don’t believe the US dollar is in imminent danger; it still dominates global trade. While its share has diminished marginally in recent years, the dollar remains the dominant reserve asset. However, it seems certain China and other BRIC nations are slowly working to diminish dollar reliance.

The US dollar remains strong compared to other currencies, including our own, which has seen the price of gold held in New Zealand dollars do quite nicely. We have numerous customers who have realised double-digit annual gains from their gold holdings in recent years and use those gains to cover higher costs they face in the form of high interest rates.

If there’s ever been a time to have gold in the mix in your investment portfolio, it’s the fast-changing and highly uncertain age we are currently living through.

For more information: Visit New Zealand Gold Merchants