Why is China hoarding gold like there's no tomorrow?

China is gobbling up gold like there's no tomorrow, outpacing all other central banks combined.

According to the World Gold Council, the People's Bank of China (PBOC) has bought more gold in the past two years than all other central banks combined.

In 2023, the PBOC ramped up gold purchases by a staggering 30%. This buying frenzy continued into 2024, with net purchases of 290 tonnes recorded in the first quarter.

That was the fourth strongest quarter since the buying streak began in 2022.

Experts say Beijing's appetite for the yellow metal is likely a major driving force behind the hold rally. In July, the price of gold reached a record high of $2,450.

"China is unquestionably driving the price of gold," said Ross Norman, chief executive of MetalsDaily.com. "The flow of gold to China has gone from solid to an absolute torrent."

What’s behind China’s appetite for gold?

But what's driving this golden obsession? Experts point to several factors.

For one, China appears to be diversifying away from U.S. dollar-denominated assets amid rising geopolitical tensions. The country has been selling off its U.S. Treasury holdings, which have dropped from over $1 trillion in early 2022 to $768.30 billion by May 2024.

"The main motivation of the PBOC is to be less dependent on the US dollar and—in an extreme case—to be less susceptible to US sanctions," Julius Baer analyst Carsten Menke told Reuters.

Menke said he expected China's desire to diversify to persist, as "the geopolitical tensions between China and the United States are unlikely to disappear anytime soon.”

Another factor is China's commitment to BRICS+, a group of emerging economies that includes Brazil, Russia, India, China, South Africa, and recent additions like Iran, Egypt, Ethiopia, Saudi Arabia, and the United Arab Emirates.

This alliance is actively seeking to reduce its reliance on the U.S. dollar in international trade. While there's no official confirmation, rumors of a gold-backed BRICS currency continue to circulate.

If such a currency were to hit the market, countries with substantial gold reserves would likely have more influence in the new system. By buying up large quantities of gold now, China could be preparing for this possibility.

According to investment banker Jim Rickards, this could be the beginning of the end of U.S. dollar dominance.

"Don't look for the dollar to go away anytime soon,” said Rickards at a recent conference. “But look for a much higher dollar price of gold and a much weaker dollar and the BRICS coming into their own."

China's gold buying slows… for now

After 18 months of consistent buying, the PBOC recently paused its gold purchases after 18 months of consistent buying. However, China's gold ambitions seem far from over.

An unnamed Chinese policy insider told Reuters that the country's gold reserves still don't reflect its status as the world's second-largest economy.

With gold's share in China's reserves lower than other major economies, the pause might be more about waiting for better prices than a change in strategy.

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