The US-China Rivalry Signals Green Light for Gold
Here's what growing tensions between the U.S. and China means for gold and more...
Last week, the U.S. Congress was back in session after its summer hiatus. There are only two weeks to go before House and Senate members are off again until the election has passed.
While no progress was made on the U.S. budget, one area of bipartisan agreement that emerged was a focus on beating China.
The U.S. Congress passed a slew of bipartisan legislation raising the stakes between the U.S. and China during its “China Week.”
They spanned from the tech sector to economic and military arenas. These bills must be passed in the Senate and signed by President Biden to become law.
While many might not make it that far, you can bet China took the hint – or at the very least, took notice. That means tensions between the U.S. and China are rising further.
Some of the continued U.S.-China rivalry will be fought in debt and gold.
The skirmishes will impact both markets and money while also serving as a bullish signal for gold.
China’s Holdings and Percentage of U.S. Treasury Debt Keeps Dropping
Since China began its 18-month gold buying streak in November 2022, after a 3-year pause, the amount of U.S. Treasury bonds the People’s Bank of China holds in reserve has declined from $782 billion to $749 billion.
That’s a decline from about 3% of all outstanding Treasuries at the time (which was $24 trillion) to 2% now.
On the other hand, according to the World Gold Council, China’s central bank was the world's largest buyer of gold in 2023. China bought 7.23 million ounces of gold last year, the largest amount per year for nearly half a century.
While China has made no purchases since May, that has not stopped the upward trajectory of gold prices to record highs. However, it has meant that the percentage of reserves China holds in gold, though clearly rising, as you can see in the chart, remains under 5% at its 2,264 tonnes holding.
Compare that to Russia’s gold reserve percentage at 29.5%, Poland’s at 13.5%, or the U.S. Federal Reserve’s at 72.41% for that matter and China’s percentage holdings are nowhere near as massive.
Now, it’s worth noting that the Fed doesn't actually own that gold; the U.S. Treasury Department does, as per the Gold Reserve Act of 1934. That Act mandated the Fed to turn over its gold in exchange for gold certificates, but that’s a story we’ll unpack another time.
Still, the U.S. government holds 8.813 metric tons of gold. And though it hasn’t made any significant purchases of gold since the 1970s, the value of existing holdings has risen with the price of gold, making it by far the largest holder of gold in value terms globally, at roughly $289 billion.
It’s clear that if China wants to compete with the U.S., one obvious place is in terms of its reserves of gold and those percentages as part of its central bank reserves.
China’s Holdings in U.S. Treasury Bonds
Over the past two decades, Japan and China have cumulated more U.S. Treasuries bonds than other countries outside of the United States. Japan’s holdings doubled from $556.3 in December 2000 to about $1.1 trillion now. Meanwhile, China's holdings of U.S. Treasuries nearly quintupled from $105.6 billion to $749.0 billion during that time.
That’s the big picture.
However, China’s holdings of U.S. Treasuries hit a high of $1.3 trillion in November 2013. They have been decreasing since 2018. Meanwhile, foreign allies of the United States, such as the United Kingdom, have made up some of that slack.
In addition, since China’s holdings hit that high, the total amount of outstanding U.S. Treasury debt has increased nearly 7-fold from $5.7 trillion to $35.3 trillion.
The total amount of foreign-held US debt is $7.9 trillion or 22.5% of all U.S. public debt. About 48% of foreign-held U.S. debt is held by foreign governments and central banks, and the rest by private foreign investors.
Doing the math, that means that the proportion of foreign-held U.S. Treasury debt held by Japan is about 13%, while the proportion held by China is 9%.
What This Gold Rivalry Means for You
If all that math is making your head spin, don’t worry. We’ll break it down for you.
The trend is this:
The U.S. owes China money.
China has been reducing the amount by which it’s subsidizing that debt and buying gold instead. There might be fluctuations in this trend on any given series of months, but it’s happening.
With the Federal Reserve now cutting rates and weakening the dollar, the move will likely be a positive for gold as a reserve and geopolitical diversification asset. This all comes at a time when the U.S Congress and the White House are upping the ante in a battle supported by legislation and tariffs. As we’ve reported here, this pattern will only continue.
With China's gold share of reserves sitting at the lowest of any other major country, you can bet one place the battle will be fought is in the gold market. And that is good for gold.
We’ll continue to follow this gold trend. For those that want to go a step further, in this month’s issue of Prinsights Premium we’ll highlight two crucial companies on the cutting edge of the trend. Upgrade to become a Premium reader by clicking here now!
excellent analysis