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China’s gold buying challenges dollar

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China is increasingly expanding its gold reserves and ditching the dollar in moves that could have implications on investments, the CEO and founder of a leading financial advisory and fintech has warned.

China’s gold reserves increased by 8.09 tons in April, according to data from the State Administration of Foreign Exchange. Total gold stockpiles reached 2,076 tons after the nation added 120 tons in the five months up to March.

“Historically, China has been a major buyer of US Treasuries, but this has seen a markedly cooling off as Beijing swaps them out in favour of gold,” said deVere Group’s Nigel Green.

“During the last few years, the US has digitally been adding an unprecedented amount of dollars to the US economy which, of course, has the effect of devaluing the greenback over time, potentially making it less of an attractive investment for China, and others.”

“It can also be reasonably expected that this strategic move will limit China’s dependence on the dollar, as trade and political relations with the US deteriorate further,” Green said.

The deVere CEO explained that buying gold, rather than dollars, may also signal moves by China that it is seeking to replace the US dollar as the world’s reserve currency.

“Building stocks of the precious metal and allowing the Chinese yuan to be traded freely would weaken the US dollar’s dominance as the global reserve currency. The move would have enormous implications, making it more expensive for the US government to borrow money and potentially to run perpetual trade and budget deficits,” Green said.

“The US is used to having the privileged position of having the key reserve currency, but others are eager to overtake it.”

Crude oil

Oil is one of the most important and widely traded commodities in the world, and it has traditionally been priced and traded in US dollars, Green added. This has given the US dollar a dominant role in financial markets, as countries that want to purchase crude oil must first acquire US dollars in order to do so.

As a reserve currency, the dollar is the default for international transactions.

For example, if an Indian company wants to buy wine from Spain, it’s probable that they will carry out the transaction in dollars. Both companies must then purchase dollars to conduct their business, fuelling greater demand. 

The value of global commodities, such as oil, is also generally demarcated in US dollars.

“If oil trading were to shift away from the US dollar, it would dramatically reduce the demand for US dollars, which would lead to a decrease in the value of the US currency.

“This could have a number of ripple effects throughout the world economy, including hugely increased inflation in the United States and potentially destabilising effects on financial markets,” noted Green.

Portfolios impacted

With the dollar seemingly losing some of its traditional dominance, investment portfolios could be impacted and might need to be repositioned to seize the opportunities and sidestep the risks.

“The key will be to ensure that your portfolio is properly diversified across asset classes, sectors, regions, and currencies.”

The deVere boss added that stock markets outside the US, particularly those in emerging markets, typically perform well when the dollar is weaker.

“US large caps and multinationals are also likely to do well, as much of their profits are generated in countries where the currencies are becoming stronger.

“Sectors that can be expected to do well with a weaker greenback include energy and industrial commodities because they are traded in dollars and, therefore, as the dollar declines, they become less expensive for non-US-based buyers.

“Tech should also do relatively well, as much of the revenue also comes from outside the United States.”