China added more gold to its foreign reserves in June, for the seventh consecutive month. This is a shrewd move as circumstances such as international tensions, low interest rates, and the possibility of currency wars all favourable to gold holders as gold is the traditional safe haven.
China is not alone. In 2018, central banks globally bought 651 tonnes of gold, up 74% compared to 2017 and the highest level since 1971, according to a member of the World Gold Council’s advisory board. Nevertheless, central banks do not buy gold based on the prospects of gold price alone.
Purchases of gold by central banks do not guarantee that gold prices will rise but they may be able to support the price of the precious metal.
Also, a rise in international tensions has proven supportive of the gold price. Analysts see ongoing tensions in the Persian Gulf and the protracted trade tensions as examples.
As gold does not pay interests, any decision to purchase gold should factor in both the costs of holding such a position and the opportunity cost of returns, for example from government bonds. With low or negative interest rates in some countries, the attraction of gold is enhanced.
There have also been questions about the sustainability of the US strong dollar policy. If markets decide that the strength of the US dollar under the Trump administration is not sustainable, investors are likely to sell the US dollar and some of them may move into gold.
China’s purchase of gold is clearly sensible.