China's Role Behind Gold's Soaring Value

Gold has hit record-breaking prices in recent months, in part due to China's strong appetite for the asset against a backdrop of tensions with Washington and broader global uncertainties.

March marked the 17th straight month in which China augmented its gold reserves, despite high prices and a weak yuan. The country purchased 27.06 metric tons in first quarter of this year, bringing its total reserves to 2,262, according to the state-owned China Gold Association.

Gold is valued as a hedge against inflation and the price volatility of other assets. It's also highly liquid, easily bought and sold at short notice.

The international bull run continued into April as buyers flocked to the safe haven amid fears of widening conflict in the Middle East and expectations the U.S. Federal Reserve would lower interest rates. A record-high intraday price of $2,431.55 per ounce was reached on April 12.

The People's Bank of China has led the charge as central banks in emerging economies bought up the metal. The public has also moved their yuan into gold bullion and jewelry, considered a safer bet in light of the country's yearslong real estate slump and staggering losses at stock exchanges.

"As we enter the traditional off season for demand, gold jewelry consumption is likely to remain tepid, especially with a local gold price that keeps refreshing record highs," Ray Jia, China research head at World Gold Council, wrote last month in a report.

"On the other hand, the shining performance of gold compared to other local assets has attracted increasing attention from investors. And this could mean continued strength for gold investment demand in China," he added.

"Official gold purchases reflect a desire to diversify foreign exchange reserves away from the dollar and other Western currencies," Eswar Prasad, Cornell University professor and a former International Monetary Fund official in charge of China, told Newsweek on Tuesday.

Guonan Ma, senior fellow with the Asian Society Policy Institute's Center for China Analysis, told Newsweek why gold may become a victim of its own success.

"Chinese investors are a price-sensitive and opportunistic bunch, as they might pause a bit when gold prices have risen noticeably," he said. "In the offshore market, the Chinese renminbi [yuan] has been strengthening against the U.S. dollar lately."

Additionally, Chinese equity shares both on and offshore "have also gained ground impressively, dampening the attractiveness of gold as an asset class."

Beijing seeks to wean itself off dollar assets, especially after having seen how the U.S. and the West leveraged the currency to punish Russia since its invasion of Ukraine, analysts say.

Though China's gold holdings comprise just 4.6 percent of its total reserves, according to the World Gold Council, the metal is among a bevy of commodities the government has been buying up at a fast pace.

This has raised questions over underlying motives, with some economists forecasting China is preparing to use the "nuclear option" of devaluing its currency to make its exports more competitive, a move likely to provoke a response from the U.S. and European Union.

After a consistently strong performance in March and early April, gold prices saw declines in the second half of the month as anxieties over an Israel-Iran war eased and the U.S. Federal Reserve signaled it would delay cutting interest rates amid persistent inflation.

In its two-day gathering that concluded on Wednesday, the central bank maintained its benchmark interest of between 5.25 and 5.5 percent.

However, Citibank Group and Bank of America analysts expect the price of gold to reach $3,000 per troy ounce within six to 18 months.

High interest rates have an inverse relationship with gold, which becomes less attractive to investors because it doesn't yield interest.

Newsweek reached out to the Chinese Foreign Ministry with a written request for comment.

Update 5/3/24, 12:20 p.m. ET: This article has been updated with a comment from Guonan Ma.