China has been on a bullion-buying spree six for straight months, starting in December 2018, amid uncertainty prompted by the Sino-American trade frictions. At the same time, the People's Bank of China (PBOC) is dumping its US Treasury holdings, triggering assumptions that "China doubles down on gold in shift away from dollar".
According to Tom McGregor, a Beijing-based political analyst and senior editor for China's national broadcaster CCTV, this is not actually the case: the PBOC is preparing for a new perfect storm in the global economy, seeking to use gold as a hedge, the analyst believes.
"The price of gold is going higher so it’s a great buying opportunity and a smart business decision by the People’s Bank of China (PBOC)", he opined. "We should not read anymore into that. A few foreign media reports have claimed that China is hoarding gold as a power play, but when gold prices go higher, smart investors know the conditions are ripe to buy gold".
The political analyst pointed out that "gold tends to go higher when there’s a global economic downturn, wars have erupted or an international crises is causing the destabilisation of the global world order".
"Gold is a safe haven investment", McGregor noted. "Beijing is worried US-China ties could get worse, so the PBOC has jumped to stockpile its gold reserves".
The US-China trade war has been simmering since March 2018 when Donald Trump announced the introduction of high tariffs on steel and aluminium. Since then, Washington and Beijing agreed upon a trade truce that was abruptly broken by the US on 10 May when the Sino-American negotiations ended without any sort of deal being reached.
Now the world is awaiting the G20 summit in Osaka, Japan wondering whether the two largest economies will meet at the negotiating table.
'Buy the Yuan, Not Gold, If US and China Strike New Trade Deal'
Meanwhile, gold may become the sole winner in the US-China trade war as the yellow metal's price is steadily soaring.
According to billionaire investor Paul Tudor Jones, in two separate interviews given to Bloomberg and CNBC, the Fed is likely to cut interest rates in 2019 due to the US-China trade war which would result in the weakening of the US dollar and the strengthening of gold.
“I think one of the best trades is gonna be gold. If I had to pick my favourite [bet] for the next 12 to 24 months, it'd probably be gold,” Jones told Bloomberg on 12 June, predicting that if it hit $1,400, it would quickly move to $1,700.
On 21 June, the precious metal burst past $1,400 per ounce reaching the highest level since September 2013 and could keep climbing.
Still, McGregor believes that the spike in the yellow metal's prices may be halted and even reversed "if US President Donald J. Trump and Chinese President Xi Jinping meet at the upcoming G20 and have fruitful talks".
The Beijing-based journalist noted that if the US finds itself dragged into a direct conflict with Iran one would also see gold soaring even higher above $2,000 an ounce.
"If tensions settle down in the Middle East, we can see gold drop in value too", he suggested. "Yes, you will see a weaker dollar if there’s a US-China trade agreement, because Beijing will ask the PBOC to raise the value of the Chinese yuan so that Washington can’t complain. China will be required to narrow trade imbalances and a stronger yuan makes that easier to do. So if you ask me, I say buy up the yuan, not gold, but only if there’s a US-China trade deal signed, sealed and delivered".
China Selling US Bonds to Boost the Yuan
Meanwhile, on 18 June, The Financial Times reported that China’s US Treasury holdings decreased to their lowest level in two years. Beijing's stockpiles of US bills and bonds fell by $7.5 billion in April bringing the country's total US Treasury stockpile to $1.11 trillion, down $90 billion from August 2017.
Simultaneously, the ING banking corporation's analytical website pointed out that investment, manufacturing and retail sales slowed in April in China although the US-China trade talks had not reached an impasse at the time.
According to McGregor, China's financial policy at the time was prompted by an incentive to strengthen the yuan.
"April was the month prior to President Trump breaking the trade truce", he said. "Beijing was expecting to sign a trade agreement with Washington and so they were setting up the variables in motion to make it a winning deal. The PBOC had to strengthen the yuan in anticipation of the trade agreement getting signed and they could make huge purchases of US imports with a stronger yuan so they would save money on transactions in the meantime. A stronger yuan makes US imports cheaper for the Chinese".
The political analyst believes that if the G20 proves disastrous, "Beijing will go back to buying up more US Treasuries to keep the nation’s currency lower, causing US imports to China to become less affordable for ordinary consumers". On the contrary, "if there’s a trade agreement, the PBOC will sell off more US Treasuries".
The Beijing-based journalist opined that at the core of the PBOC manoeuvres is the value of the yuan, not the US Federal Reserve's interest rates strategy, admitting that China still remains the largest non-American holder of US debt.
"They only ask: how can we change the value of the yuan at this moment? Because the yuan value is most important. Sometimes they need it higher and other times they need it lower", he elaborated, stressing that "US Treasuries are safe haven investment for the PBOC and to keep yuan valuations lower".
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