How China Is Driving Up Global Gold Prices

The price of gold is at a record high, not accounting for inflation, as central banks continue to buy up the metal frenetically, with the People's Bank of China leading the way.

Economists say the trend reflects Beijing's goal of diversifying away from Western dollars to hedge against geopolitical headwinds.

Gold's value is in its liquidity, return characteristics, and resilience amid political turmoil, such as the Israeli-Gaza conflict, or economic downturns compared to other assets like stocks or currencies.

Gold has been on a bull run for the past two months. Analysts have attributed this in part to expectations the U.S. Federal Reserve is poised to loosen monetary policy, lowering interest rates. Recent demand for the metal has been driven primarily by central banks in emerging markets.

This is especially true of the People's Bank of China, which increased its gold reserves for the 16th straight month in February, according to available data for that month published by the World Gold Council.

The country boosted its gold reserves by 12 metric tons to 2,257 in February and by about 5 metric tons last month, according to official data published Sunday.

The metal now comprises approximately 4 percent of the country's total reserves.

"Rising gold price and rising physical holdings from both the Chinese public and private sectors can be consistent with large outflows from gold ETFs," Guonan Ma, a senior fellow at the Asia Society Policy Institute think tank, told Newsweek.

"Beijing has been adding its official gold reserves for the past 14 months, in part to diversify away from dollar assets in light of the recent Russian experience and simmering Sino-U.S. geopolitics," he said.

Ma said China prefers gold bullion rather than gold ETFs, or investment funds that track the price of the metal and are traded on stock exchanges because the latter are largely supervised by Western governments.

Meanwhile, Chinese households are also increasingly turning to bullion as well as gold jewelry as a stabler alternative to securities like stocks, with the Chinese stock market having lost almost $5 trillion in the last three years alone.

Gold jewelry purchases were up 8 percent last year and demand for gold coins by almost 16 percent.

Ma pointed out private demand in China, which is also the largest producer of gold, skews toward physical gold because of citizens' limited access to gold ETFs and the government's tight capital controls.

Overall, China's official reserve assets hit their highest level since November 2015. In terms of foreign exchange reserves, these rose to $3.25 trillion, a 27-month high, as the central bank continues to diversify to hedge against risks.