PBOC joins global uptrend of increasing bullion holdings to hedge uncertainties

China stepped up its gold purchases in August even as bullion prices surged — a move experts said would help fine-tune the country's international reserves portfolio and cushion the impact of heightened uncertainty over the credibility of the dollar-based monetary system.

Rather than being a bet on short-term price gains, the extended buying streak points to China's long-term strategy of building up its gold holdings to enhance financial security and further support the renminbi's internationalization, they added.

The People's Bank of China, the country's central bank, increased its gold reserves for the 22nd consecutive month in August, bringing China's official gold holdings to 76.73 million ounces at the end of the month, up from 76.08 million oz at the end of July, official data showed on Monday.

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The monthly addition of 650,000 oz was the largest since October 2023, when the increment came in at 740,000 oz, according to market tracker Wind Info.

Gold prices recorded one of their strongest monthly gains of the year in August, with London spot gold rising 9.7 percent during the month and briefly approaching the $4,700-per-oz mark.

The rally gained momentum after the US Treasury said in a statement in mid-August that it would at least double the maximum size per operation of liquidity-support buybacks for longer-dated Treasury securities, a move that fuelled concerns over persistent inflationary pressures and further dollar weakness.

China's accelerated gold buying in August may have reflected growing concerns over US fiscal risks and the dollar's credibility, according to Wang Qing, chief macroeconomic analyst at Orient Golden Credit Rating International.

"Even with bullion at elevated levels, further purchases would help improve the composition of the country's international reserves," Wang said.

China's continued purchases came amid a broader rebound in central bank gold demand. Ray Jia, head of research for Asia-Pacific excluding India at the World Gold Council, said central bank gold purchases saw a strong rebound in the second quarter, rising to 289 metric tons, up more than 60 percent year-on-year and beyond the historical average.

"While some central banks may tactically adjust the pace of purchases in response to short-term price movements, our survey shows that hedging against geopolitical risks and diversifying reserves remain the main reasons for buying gold. Price is not a primary consideration," Jia said.

Gold carries no sovereign credit risk, making it particularly attractive to central banks seeking to diversify their reserves, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance. Increasing allocations to the yellow metal can also reduce the risks associated with overreliance on the dollar, he added.

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Looking ahead, gold prices could remain volatile in the short term, with market sentiment and geopolitical developments likely to be the main drivers, Dong said. Over the longer term, however, central bank buying and de-dollarization would continue to provide structural support for gold.

"As long as concerns over the credibility of the dollar-based monetary system persist, gold will retain its appeal as a reserve asset," he added.

China's gold holdings remain relatively low as a share of its reserves, leaving considerable room for further purchases, said Wang of Orient Golden Credit Rating International.

Noting that gold is widely accepted as a final means of payment, Wang said larger gold holdings could strengthen the credibility of the RMB and create favorable conditions for steadily and prudently advancing the currency's internationalization.

"Continued gold purchases are likely to remain part of the central bank's long-term strategy," he added.

Contact the writers at zhangchenxu@chinadaily.com.cn