China is dumping U.S. Treasuries to buy gold – FX Empire’s Zernov

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(Kitco News) –
China is selling off massive quantities of its U.S. assets, and has little choice but to reallocate the funds to gold, according to Vladimir Zernov, Market Analyst at FX Empire.

Zernov noted that U.S. Treasury data indicates that China is selling U.S. assets at a rapid pace. “Some observers believe that China tries to provide support to its currency,” he wrote. “However, China may be selling U.S. assets due to geopolitical tensions.”

Zernov said he believes that China does not have too many options if it wants to reallocate its reserves, and gold is one of the few viable alternatives to U.S. Treasuries. “In this scenario, China could increase its gold purchases in the upcoming months,” he wrote.

According to recent data from the U.S. Treasury, Chinese investors sold $21.2 billion worth of U.S. assets in the month of August. “While Fed policy outlook was the biggest driver behind the sell-off in Treasuries, it looks that China’s activity contributed to the move that pushed the yield of 30-year Treasuries towards 5.00%,” he wrote.

Zernov said he believes that, contrary to the prevailing market view, high Treasury yields may actually serve as an additional bullish catalyst for gold. “Traders are searching for safe-haven assets due to geopolitical tensions,” he wrote. “Treasuries are considered to be among the safest assets in the world, but their price is falling for months, and some investors may choose to buy gold.”

Chinese investors may be among the first ones to redeploy their funds to gold markets, according to Zernov.

“There are two main theories about the reasons of China’s rapid selling of U.S. assets,” he said. Firstly, China needs to support the yuan. “The country’s currency settled near multi-year lows against the U.S. dollar as investors focused on the problems of China’s economy,” he wrote. “Selling dollar-denominated assets to provide support to yuan makes perfect sense.”

The second reason, Zernov suggested, is that China’s activity could be due to geopolitical tensions between the U.S. and China, which are getting worse day by day. “If China is trying to shift some money away from the U.S.-controlled financial system, it does not have too many options,” he wrote.

Recent gold purchase data support the theory that China is moving heavily into gold as they liquidate U.S. debt. The People’s Bank of China (PBoC) has been buying gold at a torrid pace. According to updated foreign reserve data, China’s central bank bought 29 tonnes of gold in August, lifting year-to-date purchases to 155 tonnes. It was also the central bank’s biggest purchase since December.

And it’s not just the Chinese state that’s shown a voracious appetite for the yellow metal. Recent months have seen China’s domestic gold prices spike well above international spot prices as the country’s wealthy and middle class have clamored to secure the value of their own savings.

The population’s desire for gold was so great that the PBoC intervened in the market by banning banks from importing gold, which pushed the spread between the spot price of gold in Shanghai and in London to a record $121 per ounce in mid-September.