China expanded its gold reserves for the third straight month, strengthening the bulls’ case that central bank demand will remain elevated this year and putting Asia’s top economy on track to be the biggest buyer after Russia should its recent pace of accumulation be sustained.
The People’s Bank of China increased holdings to 60.26mn ounces in February from 59.94mn a month earlier, according to data on its website.
Last month’s inflow of 9.95 tonnes follows the addition of 11.8 tonnes in January and 9.95 tonnes in December, when buying restarted after a two-year pause.
Russia leads the pack among central banks, taking in 274.3 tonnes in 2018.
“Ongoing efforts to diversify total reserves – away from the US dollar – has prompted gold purchases by the PBoC, which we believe will continue,” said Robin Bhar, head of metals research at Societe Generale SA.
Most of these purchases by central banks “are aimed to increase assets having no counterparty risks, unlike US Treasuries,” Bhar said in an e-mail.
Central-bank buying was a significant component of global bullion demand last year, hitting the highest level in decades, according to data from the producer-funded World Gold Council.
China’s decision to restart its purchases comes amid signs of slowing growth at home, and as policy makers in Beijing seek to strike a trade deal with Washington.
Russia, which is “de- dollarising” its reserves, has bought more than 200 tonnes in each of the past four years, with the push funded by the almost total sale of its US Treasuries, according to the WGC.
“China will keep buying on a regular basis, but we would not be surprised if there were months when they don’t,” said Ross Strachan at Capital Economics Ltd. “Overall, we would expect them to be the second-largest purchaser this year. The motivation will be to diversify their foreign-exchange reserves, and increase gold from its current very low percentage of these reserves.”
While China’s gold holdings are the sixth-largest by country, they account for only 2.4% of its reserves, compared with more than 70% in Germany and the US, WGC data show.
Central bank purchases are likely to be sustained in 2019 at the same level as last year amid elevated geopolitical tensions and less pressure on emerging-market currencies, Goldman Sachs Group Inc said in a March 4 report.
Kazakhstan added about 50 tonnes last year, and was joined by other countries including Poland, India and Hungary, which picked up smaller amounts.
Gold fell in February after four months of gains as equity markets rose on signals a US-China trade resolution was in sight.
Bullion for immediate delivery was at $1,293 an ounce yesterday, up 8% over six months.
Goldman is among the bulls, predicting a rally to $1,450 over the next year.
“Often the PBoC is more erratic in buying gold, unlike the Russian central bank in 2018,” Georgette Boele, senior precious metals and diamond analyst at ABN Amro Bank NV, said in an e-mail. “So I’m not expecting that they would buy every month. Their strategy appears to be different than that of the Russian central bank. China’s first priority is to support the economy.”
China has previously gone long periods without revealing increases in gold holdings.
When the central bank announced a 57% jump in reserves to 53.3mn ounces in mid-2015, it was the first update in six years, and the start of increases nearly every month until October 2016.
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