Gold rush of central banks reflects fragile and unbalanced recovery

The World Gold Council said in a report on Monday that central banks continued to buy gold on a large scale in October, pushing global official gold reserves to increase by a net 42 metric tons in a month.

It is unusual for so many central banks to hoard gold on such a large scale. Although a most reliable safe asset, geopolitical conflicts do not necessarily lead to a spike in gold prices. In fact, the price of gold went down during the United States-led wars in Afghanistan and Iraq. However, the Russia-Ukraine and Israel-Palestine conflicts, in which the US is not directly involved, have triggered a rise in gold prices.

The decline in the US dollar's credibility is another major reason. It is a long-established law that gold prices fall when dollar assets are reliable, and rise when dollar assets become riskier. As of October, the US' debt had reached a record $33.5 trillion. The US has raised its debt ceiling time and again, which is equal to paying old debts with the new, resulting in the ratio of its debt to GDP exceeding 120 percent, far above the 60 percent international warning line. The age-old belief that US treasuries were the most liquid "risk-free assets" is now under a cloud.

After the US Federal Reserve raised interest rates 11 times since March 2022, pushing the federal funds rate to its highest level in 22 years, the market widely expects the Fed to start a rate cut cycle next year. The decline in the credit of dollar assets, as well as the risk of asset impairment caused by the US' rate cuts, has also caused other central banks to sell dollars and buy gold.

As one of the biggest buyers of gold in recent years, China has increased its holding for 13 consecutive months. There is a particular need for China's central bank to increase its gold holdings, given that its gold reserves stood at 2,214.60 tons at the end of October, just 4.3 percent of its foreign exchange reserves. Appropriately increasing gold holdings can help China safeguard national economic security, maintain the investment flexibility of the financial market, and prepare for the internationalization of the renminbi. It will also make it ready for the expansion of the economy and consumption in the times ahead.