The financial relationship between China and the United States has undoubtedly transformed into a complex battleground, marked by rivalry and competition that are difficult to disentangleThe volatility of the dollar, which saw an impressive 8% rise in the index since September 2023, does not necessarily imply that the dollar retains its status as a stable and reliable currencyIn fact, the dollar index often serves merely as a comparative measure against the currencies of other nations.

In direct response to an aggressive American financial landscape, the People's Bank of China (PBOC) made a significant move to bolster its gold reserves after a six-month pause in gold purchasesThis assertive acquisition comes at a time when the price of gold against the dollar has reached historical peaks, sparking questions about the motivations driving this sudden interest in gold.

Why did the central bank opt to purchase gold at such high prices? What ramifications does this have for the international financial markets?

China's Central Bank Increases Gold Holdings

On December 7, the State Administration of Foreign Exchange (SAFE) released new data indicating that as of the end of November, China’s gold reserves amounted to 72.96 million ounces, a rise of 160,000 ounces or roughly 4.54 tons, compared to the end of October

This development reflects a steady increase in foreign exchange reserves despite multiple attacks and sanctions from the US on Chinese trade.

As of the end of November 2024, China's foreign exchange reserves stood at $32,659 billion, an increase of $4.8 billion from the end of October, marking a slight rise of 0.15%. These figures suggest that even amidst international turbulence, Chinese goods maintain a strong competitive edge.

Currently, the PBOC is experiencing a two-faceted approach: growing foreign exchange reserves while simultaneously diversifying those reservesSince the continuing interest rate hikes initiated by the Federal Reserve in 2022, the PBOC has been actively purchasing gold on the international market to enrich its foreign reserves.

Conversely, over the past few years, China has been gradually reducing its holdings of US Treasury bondsThis gradual divestment aligns with the increasing scale of US debt, demonstrating a cautious strategy towards US financial instruments.

Traditionally, the central bank does not casually engage in gold purchases; when it decides to do so, the initiative tends to have a long-term effect due to the need for policy continuity

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This time, however, the intervals between the central bank's purchases of gold have significantly shortened.

After the 2008 financial crisis, the PBOC recognized the risks associated with excessive dollar holdings and began to increase its gold reservesNonetheless, for the subsequent six years, China's gold reserves remained staticA notable increase occurred in 2015 when the central bank engaged in extensive gold purchases for a full 16 months before pausing in October 2016. Following the onset of the US-China trade war in 2018, the PBOC acquired 105 tons of gold over a nine-month period, marking the third major acquisitionThe fourth round of significant purchases occurred in November 2022 when gold buying continued for an 18-month span.

Now, we have witnessed a fifth round of gold acquisitions, remarkably within just six months, pointing towards a sense of urgency from the central bank

Historically, government entities have waited for gold prices to stabilize or dip slightly before making purchases, yet in November, the central bank bought gold at unprecedented price heights, raising the question of whether its buying activities have actually contributed to the surge in gold prices.

Signals of US Dollar and Treasury Bond Collapse

For the average individual, gold may symbolize adornment or safeguarding wealth, but for a nation's central bank, it represents the bedrock of international currency stabilityBefore the collapse of the Bretton Woods system, the dollar was not bound to oil; its value was directly tied to gold reservesAt that time, the US was celebrated as the world's leading gold reserve holder, anchoring the value of the dollar and consequently establishing a modern monetary theory in which other nations' currencies were pegged to the dollar.

However, the over-issuance of dollars led to a substantial outflow of gold from the US

When the country failed to hold enough gold to back its dollar supply, it ultimately severed the dollar's link to gold—an act of default precipitated by the financial burdens imposed by the Vietnam War and the excessive issuance of US debt.

In the years following 2019, the United States hastily engaged in a trade and financial conflict with China, adding tariffs on Chinese goodsAs part of maintaining its economic stability, the speed at which US debt is issued has escalated dramatically, indicating that both the actual value and the credit worthiness of the dollar are diminishing.

Since the commencement of the US-China trade war, the price of gold skyrocketed from about $1,200 to a staggering $2,800—an increase of 1.3 timesEven though the dollar index has demonstrated strength, there lies an underlying narrative where the dollar's purchasing power continuously declines

This decline subtly underscores the undervaluation of the Chinese yuan in terms of purchase power parity.

Will the scale of US debt again dramatically expand beyond comprehension? Such risks remain unpredictableWhat is certain is that the current state of US fiscal taxation has reached a point where it can no longer support the government's normal operationsConsequently, there is a shift towards exploring virtual currencies like Bitcoin as a potential solution to issues surrounding US debt.

In this climate, the inclination for the United States to default on its obligations is becoming glaringly apparent, although the format of such a potential default remains uncertain, with significant divides and discussions ongoing internallyPreviously, the reliance on petrodollars is waning, prompting a move toward positioning virtual currencies within the financial ecosystem to reaffirm the USD's standing.

Nevertheless, the Federal Reserve appears to be seeking to temporarily defend the dollar—potentially resorting to devaluation as a means of defaulting on obligations