10 May

China’s gold buying spree challenges the dollar and may impact your investments

May 10, 2023

By George Prior

China is increasingly expanding its gold reserves and ditching the dollar in moves that could have implications for your investments, warns the CEO and founder of one of the world’s largest independent financial advisory, asset management and fintech organizations.

The warning from Nigel Green of deVere Group comes as it is revealed that China’s gold reserves increased by 8.09 tons in April, according to data from the State Administration of Foreign Exchange. Total gold stockpiles reached 2,076 tons after the nation added 120 tons in the five months through March.

He says: “Historically, China has been a major buyer of US Treasuries, but this has seen a markedly cooling off as Beijing swaps them out in favour of gold.

“During the last few years, the US has digitally been adding an unprecedented amount of dollars to the US economy which, of course, has the effect of devaluing the greenback over time, potentially making it less of an attractive investment for China, and others.”

“It can also be reasonably expected that this strategic move will limit its dependence on the dollar, as trade and political relations with the US deteriorate further.”

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The deVere CEO continues: “Buying gold rather than dollars may also signal moves by China that it is eventually seeking to replace the US dollar as the world’s reserve currency.

“Building stocks of the precious metal and allowing the Chinese yuan to be traded freely would weaken the US dollar’s dominance as the global reserve currency. The move would have enormous implications, making it more expensive for the US government to borrow money and potentially to run perpetual trade and budget deficits.

“The US is used to having the privileged position of having the key reserve currency, but others are eager to take over it.”

Oil is one of the most important and widely traded commodities in the world, and it has traditionally been priced and traded in US dollars. This has given the US dollar a dominant role in global financial markets, as countries that want to purchase oil must first acquire US dollars in order to do so.

As a reserve currency, the dollar is the default for international transactions. For example, an Indian company wants to buy wine from Spain, it’s probable that they will carry out the transaction in dollars. Both companies must then purchase dollars to conduct their business, fuelling greater demand.

The value of global commodities, such as oil, is also generally demarcated in US dollars.

“If oil trading were to shift away from the US dollar, it would dramatically reduce the demand for US dollars, which would lead to a decrease in the value of the US currency. This could have a number of ripple effects throughout the global economy, including hugely increased inflation in the United States and potentially destabilising effects on financial markets,” notes Nigel Green.

With the dollar seemingly losing some of its traditional dominance, investment portfolios could be impacted and might need to be repositioned to seize the opportunities and sidestep the risks.

“As ever, the key will be to seek professional advice from an advisor and to ensure that your portfolio is properly diversified across asset classes, sectors, regions, and currencies.”

He goes on to add that: “Stock markets outside the US, particularly those in emerging markets, typically perform well when the dollar is weaker.

“US large caps and multinationals are also likely to do well as much of their profits are generated in countries where the currencies are becoming stronger.

“Sectors that can be expected to do well with a weaker greenback include energy and industrial commodities because they are traded in dollars and, therefore, as the dollar declines, they become less expensive for non-US-based buyers.

“Tech should also do relatively well, as much of the revenue also comes from outside the United States.”

Nigel Green concludes: “The strategic move by China to increasingly buy more gold and less US dollars could, in the longer-term, have a significant effect on the global financial system and investment planning.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of more than 70 offices across the world, over 80,000 clients and $12bn under advisement.


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