Why is China accumulating Gold at a record pace?
·
Considering the correlation between M2 & core
inflation with Gold, along with geopolitical premium, $4400-4500 may be the
best-case scenario for Gold.
·
Apart from geopolitical and macroeconomic issues,
China is accumulating gold to support CNY credibility as an alternative to the
'king' USD
Gold (XAU/USD) has undergone an insane rally over
the past few years, roughly doubling from around $2,000 per ounce in late 2023
to almost $4,400 per ounce by late 2025—a gain of almost 120%. This dramatic
& unusual rally has been led by a combination of macroeconomic pressures,
global uncertainties, safe-haven demand, and US hegemony, unilateralism over
USD sanctions, especially visible after the Russia-Ukraine war erupted.
Why is gold
looking like a highly volatile commodity in 2025?
In 2025 specifically, under Trump 2.0, the yellow
metal hit multiple record highs, including $4,381 in October, driven by
uncertain bellicose policies, including trade, tariffs & tech wars. Also,
Trump's never-ending pressure on the Fed and its Chair Powell over abrupt rate
cuts and Trump's action to nominate a 'yes man' for the next Fed Chair, along
with 'loyalists' Fed governors, is eroding Fed credibility and the confidence
in the USD.
Gold is also a major beneficiary of the
never-ending trade & tech war between the US and China, the two largest
economies in the world. Although now at a truce stage amid regular interactions
between Trump and Xi, an all-out trade & tech war in the future may cause
synchronized global stagflation or even an all-out recession.
Gold is also being boosted as Fed Chair Powell
& Co. eventually capitulates on Trump pressure and almost indicated another
25 bps rate cut in December after back-to-back similar rate cuts in September
and October’25. After the end of QT from December 1, 2025, Powell also hinted
at the Fed's balance sheet rejig: as a part of a longer-term strategy, the Fed
may continue the QT of MBS (i.e., mortgage bond securities) against QE of USTs.
In other words, the Fed may remove MBS from its
balance sheet, while adding, i.e., buying equivalent USTs to keep the size of
the balance sheet at the desired levels, around 22% of nominal US GDP. This
will ensure money or funding market stability without causing any sudden repo
surge, which we have seen during late 2019 under Trump 1.0 amid the US-China
trade war.
Gold was also boosted by the lingering US
government shutdown saga, which is affecting USD and also USTs amid political
& policy paralysis. Gold went crazy parabolic in 2025, gained almost 75% in
2025 (YTD), especially after mid-August, when it was at the peak of the
US-China trade & tariff war narrative. This follows Trump's April 2 announcement of
reciprocal tariffs on almost all major countries/trading partners, ranging from
10% to 51%.
In brief, Gold is an age-old hard asset, gaining steadily
from never-ending public (Govt) deficit, increasing public debt, and currency
devaluation. The more we print paper currency to serve public debt obligations,
the more currency devaluation and inflation (higher cost of living). Gold as an
inflation hedge, non-yielding haven asset, limited in supply (unlike paper
currency-USD, which can be printed unlimited theoretically). Gold is a major beneficiary of 3D-deficit, debt, and devaluation.
Gold acts
as a classic inflation hedge,
as rising M2 (money supply/printing) devalues currency, causing higher prices
(inflation/cost of living/everything) and also undermining the fixed-income
assets. Inflation concerns, combined with expectations of more Fed rate cuts,
have made non-yielding physical assets like gold more attractive than bonds
*lower real yield) or cash. For instance, the Fed's aggressive hikes from
near-zero to over 5% in 2022–2023 initially pressured gold, but subsequent
easing in 2024 and two cuts in 2025 reversed this, boosting prices. The Fed may
cut rates by a further 75-100 bps during Dec’25-Derc’26 as the base case.
In the worst case of an all-out US recession due to
Trump’s chaotic policies, the Fed may also slash rates to almost zero and
launch QE-4 in 2026-27. The US economy may face stagflation or even an all-out
recession due to Trump’s uncertain policies, weakening labor market, increasing
inflation, growing loan defaults (both subprime & prime categories), and a
looming AI bubble. All these may boost Gold further in 2026-27. A weaker USD—plunged
over 10% since Trump took office (White House) back in Jan’25 is also positive
for gold as a cheaper alternative for USD for foreign buyers. It also amplifies
its appeal as a USD alternative, strengthening the broader de-dollarization
efforts by EM central banks.
Gold’s
insane journey from slumber in 2019 to megastar in 2025:
During
COVID (2020), Gold was around
$1200 levels; but the mega COVID stimulus provided by the US and almost all
other major economies in the world- both monetary & fiscal, caused Gold to
be out of slumber, surged to around $1800-2000. Gold was holding firm around
2000 after the Ukraine war (Russia-Ukraine) broke out in early 2022; Russia
reportedly sold a part of its holdings to fund the war.
Then, Gold broke $2000 levels on the flight to
safety and decreased public confidence in local currency units (LCU),
especially in war-affected Middle-East countries, after the Gaza war broke out
in late 2023. The increasing dollarization & goldilization of the economy
as LCU has turned virtually into toilet paper in various Emerging Market
Economies (EMEs) is also boosting the appeal of gold as a century-old inflation
hedge & haven asset, limited in supply.
Gold reached almost $4400 by late-October, now eying
$4500 levels by Dec’25-Mar’26 amid Trump’s bellicose policies from trade to
tech, coupled with a tendency to use both tariff & USD as a weapon in
scoring various geopolitical issues, not only against so-called adversaries,
but also known allies. Trump/US hegemony for USD is resulting in huge gold
buying by major Central Banks, which has led to the insane parabolic move in
2025. In summary, gold's rise reflects intertwined fears of increasing public
deficit, debts, and currency devaluation, de-dollarization, and geopolitics—exacerbated
by Trump's tariffs and USD hegemony.
The Ukraine war broke out due to the double
standard of both the US and Europe, coupled with Putin's NATO phobia. The real
reason may be to control vast untapped rare earth materials (REMs) in Eastern
Ukraine. But subsequent US/G7 sanctions on Russia and economic/geo-political
fragmentations altered almost all other major EMs, including China and India,
to buy gold as an alternative to USD/USTs.
As of now, there is no real alternative to USD as a
universal (common) trade and other financial transactions settlement currency
(~47%), and EUR (~22%) is a distant 2nd, followed by British Pound
(GBP~7%), China’s CNY (~5%), and Japan's JPY (~3%). But China is also steadily
expanding its CNY trade, and now almost 50% of BRICS trade (~$800B) is
happening in CNY, up from 25% in early 2025- undermining the USD influence as
Global Reserve Currency (GRC) status. There are SWIFT alternatives like BRICS
Pay and the CIPS (Cross-Border Interbank Payment System).
U.S. hegemony and sanctions prompted EM central
banks—especially in China—to hoard gold as a neutral reserve asset. Central
bank purchases hit robust levels, with 900 tonnes forecasted for 2025 alone,
averaging 710 tonnes quarterly. Beyond geopolitics, investors piled in via ETFs
(310 tonnes of inflows in 2025-YTD) and physical buying, viewing gold as
protection against economic slowdowns and Trumponomics narratives. All these
triggers are causing an insane rally of Gold from slumber in 2019 (pre-COVID)
to a superstar in 2025 (Trump 2.0). Gold rallied the most in 2025 annually
since the late 1970s. Trump's unconventional policies and style of functioning are
turning gold from an age-old orderly commodity (predictable volatility) to a
fierce competitor of AI/Tech stocks.
Why are
aligned Central Banks chasing Gold?
In summary, the increasing tendency of tariffs
& USD hegemony, coupled with US unilateralism rather than globalism, alerted
other nations (both friends & foes), which are then steadily diversifying
into Gold as an asset class against USD/USTs. This has led to an increase in
the buying of Physical gold by various Emerging Market Central Banks like China’s
PBOC and India’s RBI. Increased buying of Gold by China, India, and other BRICS
nations is fueling the Yellow metal; there are many more Gold buyers than
sellers at institutional levels, led by major/minor EM Central Banks.
So, who is
buying so much Gold at these insane levels?
As a simple answer, China is buying Gold
directly/indirectly to shore up its official/unofficial Gold reserve against
the currency (CNY) for an alternative GRC against USD & EUR. China may also
make CNY fully convertible in the coming days for its perceived effort to make
CNY a real alternative to the 'King USD'. Over the last few decades, China's
GDP and M2 (Money Supply/Printing) grew much faster than the official Gold
reserve. In fact, the US holds ~8.1T gold vs China's 2.3T; almost 4 times
higher, while nominal GDP $29T vs $19T is only 1.5 times higher. Thus, China is
trying to catch up with the US/USD hegemony by stockpiling Gold in its own
control, especially after the Russian USD/UST/EUR asset freezing and sanctions
fiasco (Ukraine war).
The US GDP/Gold ratio is now ~3.75; by 2025, China
will be ~$20T economy vs US $30T; if China wants to achieve this ratio, then it
has to officially hold 7.5T of Gold vs present 2.3T by 2025!
China is far behind the US in terms of its official
Gold reserve to back up the huge M2. Thus, China is now scrambling to buy Gold
directly/indirectly through various proxies and may continue to buy steadily
for the next 25 years to catch up with the US and challenge the USD hegemony,
which is the real vulnerability of China right now.
China is now the de facto number two superpower in the world, if not number one, surpassing the U.S. in terms of economy, military, and tech. But despite that, one of the most significant strategic areas in which China lags is the USD; it needs to make the CNY a global alternative to the USD as a trade currency. Thus, China is now buying gold for the CNY credibility; the US has a 4-times higher gold reserve than China, despite a comparable economy size.
And as a fan of good-ols Bretton Woods Gold-backed
currency regime, Trump may also bring back a modified version of that as a part
& parcel of his unconventional policies to compete with increasingly mighty
China. Unlike Trump 1.0, Trump 2.0 is no longer seeking complete/partial China
decoupling, but strategic derisking. Trump also views the USD as his most
effective geopolitical tool and sees the loss of the USD's status as GRC as a
big defeat in a war. Trump also threatens BRICS and other nations regularly to
impose 100-500% tariffs for their perceived effort to undermine the USD
hegemony.
China's
Gold Buying: The Hidden Reason Behind the Insane Gold Rally?
China's aggressive, multi-channel accumulation to
bolster its official PBOC reserves is an effort to diversify from the USD and
position the yuan (CNY) as a viable alternative in global finance. While central bank (PBOC) buying overall has
been robust (634 tonnes net through September 2025, the highest since 2022),
China's share stands out for its scale, secrecy, and strategic
intent—especially at these elevated prices where retail and speculative demand
often cools.
The
"10x" Gap between China’s official & unofficial gold buying spree
People's Bank of China (PBOC), China's Central Bank,
officially reports modest official additions, but there are various reports
about unofficial buying too. As of October 2025, China’s official reserves
stand at 2,304.5 tonnes, up 24 tonnes year-to-date (YTD)—a 1% increase from
end-2024. This includes 15 tonnes added in September alone, marking the 12th
straight month of PBOC purchases.
Various unofficial estimates indicate true 2025
buying at ~ 10 times the reported 25 tonnes, implying 250+ tonnes acquired.
Total hidden Gold reserves of China may exceed 5,000 tonnes (more than double
the official PBOC figure), accumulated via various proxies like state-owned
entities, sovereign wealth funds, and other private proxies to avoid market
volatility. This is in line with gold insurance data and also explains why
physical demand in Shanghai remains "unseasonably strong" despite
high prices. It's a deliberate opacity tactic, echoing Russia's pre-2022
stealth buildup to evade sanctions.
Overall global central bank buying hit 19 tonnes
net in August 2025 alone, but China's pace of 250 tonnes (official + estimated)
accounts for ~30-40% of the YTD total, outpacing India (75 tonnes) and Turkey
(45 tonnes).
Is China
scrambling to buy gold (officially & unofficially) to support growing M2
and GDP?
China’s Historical
M2 vs. Gold Growth: Over the last
20 years, China's M2 money supply exploded from ~CNY 18 trillion ($2.5T) in
2005 to CNY 335 trillion (~$46T) in October 2025, a 1,800%+ rise at 18% CAGR;
the US M2 stands around $22T at October’25. China’s official gold reserve grew
by only around 1% annually, officially, from ~600 tonnes to 2,304 tonnes. Gold
now covers only ~0.6% of M2 (vs. 2-3% in the US), leaving the CNY vulnerable to
inflation and capital flight. This mismatch amplified post-2008 stimulus and COVID-era
printing, where M2 surged 30%+ (y/y) in peaks. The US’s gold reserves are stable
at 8,133 tonnes (Q3 2025); China's ~$3.3T PBOC reserve (with gold at just 7%
vs. US ~75% in Western averages). The "hegemony gap" is stark—USD's
reserve status lets the US run deficits with minimal gold backing, while CNY's
5% global share demands harder assets. If we consider China’s official &
unofficial gold reserve ~5000T, the ‘hegemony gap’ will be much lower.
China’s
Strategic Motivations: De-Dollarization and CNY Convertibility
Post-Ukraine sanctions froze $300B+ in Russian
assets, exposing China's $800B+ US Treasuries to similar risks—especially under
Trump 2.0's tariff escalations. Gold is the antidote:
v GRC
Ambitions: Beijing eyes a
"gold-renminbi" (GRC) basket for BRICS trade, with yuan
internationalization accelerating (now 5% of global payments).
v Full CNY
convertibility—rumored for
2026-2027 via digital yuan pilots—requires credible backing; gold
diversification hits 20-30% of reserves in models.
v Long-Term Horizon: At 100 tonnes/year officially and 200 tonnes/year
unofficially- China could hit 5,000 tonnes by 2030 and 10,000+ by 2050,
challenging the USD's 60% reserve dominance. This isn't panic buying but
"patient capitalism"—sustained even at $4,900/oz forecasts for 2026.
Beyond
China: Other High-Price Buyers: While
China dominates (~40% of demand), others pile in at these levels:
·
Emerging Central
Banks: Poland (100+ tonnes YTD), India (retail + RBI), and Turkey (inflation
& currency hedge).
·
Retail/ETFs in Asia:
Chinese households added 200 tonnes via jewelry/bars; global ETFs saw $10B
inflows YTD.
·
Hedge Funds:
Speculative longs via futures, betting on continued opacity.
BIS and
Gold's Role in Reserve Regulations: A Basel III Perspective
The Bank for International Settlements (BIS)—the
"central bank for central banks"—and its pivotal influence on how
gold fits into global banking standards. While the BIS doesn't explicitly
"designate" gold as a direct substitute for USD or US Treasuries (USTs)
in a one-for-one swap, its Basel III framework (finalized in 2017 and fully
implemented by 2025) effectively elevates gold to Tier 1 high-quality liquid
asset (HQLA) status, making it a viable alternative for meeting reserve and
liquidity requirements. This has supercharged central bank and commercial bank
demand, especially for institutions like China's PBOC seeking to de-risk from
dollar exposure.
Sovereign debt like USTs has long been a Tier 1
asset (zero-risk weighted, counting fully toward capital ratios). From June
2021 (with full effects by 2025), Basel III classifies allocated physical gold
(bullion held in vaults or on account) as a Tier 1 asset with a 0% risk weight—on
par with cash, central bank reserves, and USTs. Unallocated gold (paper claims)
gets a 50-85% haircut, incentivizing physical holdings. This means banks can
use gold to satisfy the Liquidity Coverage Ratio (LCR): 100% credit for gold in
the HQLA basket, up from 50% pre-2021. Gold counts as a stable funding source,
reducing reliance on short-term USD funding in the Net Stable Funding Ratio
(NSFR).
Why This
Matters for Reserves: For central
banks and commercial banks, this removes gold's "barbarous relic"
stigma (per Keynes) and positions it as a neutral hedge against fiat
volatility. In a multipolar world, it's ideal for diversification without
counterparty risk—gold doesn't default like bonds or inflate like currencies. The BIS's own research (e.g., 2023 Annual
Economic Report) notes gold's "safe-haven" role has grown, with its
share in global reserves hitting 20-27% by 2025, overtaking USTs for the first
time since 1996. This isn't just China: Post-Russia/Ukraine sanctions,
banks repatriated gold (e.g., India's RBI brought back 64 tonnes in H1 2025,
now holding 65% domestically at BIS/BoE vaults) to comply without dollar
dependency.
BIS rules
explain why buying persists even at $4,000+ levels- EME central banks (China, Poland, India) added
634 tonnes net through Q3 2025, with gold's HQLA parity drawing $10B+ in bank
ETF inflows. In essence, the BIS's Basel III framework has quietly
"designated" gold as a regulatory peer to USD/USTs, fueling the
parabolic rally.
EM Central
Banks' Increasing Secrecy on Gold Holdings in 2025
Like China's People's Bank of China (PBOC), several
other EME (Emerging Market Economy) central banks—particularly vulnerable to US
sanctions or already sanctioned and geopolitically exposed nations—have adopted
more opaque reporting practices for their gold reserves. This trend,
accelerating since Russia's 2022 Ukraine war and subsequent USD/EUR asset
freezes by the West/G7, reflects a strategic shift toward discretion to avoid
market distortion, sanctions risks, and competitive disadvantages during
accumulation.
This
secrecy is selective & objective—advanced
economies (AEs) like the US, Germany, and the ECB remain transparent—but it's
pronounced among ~20-25% of developing economies (DEs) central banks,
especially those diversifying from USD assets amid Trump 2.0 tariffs and
de-dollarization, gradually without much noise and Trump's 500% tariff power!
·
Russia: Official
holding ~2333T vs 2800T unofficial
·
Turkey: ~615T vs
700T
·
India: 876T vs
925T
·
Kazakhstan: 402T
vs 450T
·
Poland: 440T vs
465T
·
Singapore: 228T
vs 250T
·
Iran: unreported
vs 300+T
·
Azerbaijan:
Unreported vs 70+T
Major sellers of gold were the Uzbekistan and
Indonesian Central Banks. In summary, while not all banks are secretive, the trend
is real and growing among 10-15 major players, sustaining demand floors. While the International Monetary Fund (IMF)
and World Gold Council (WGC) compile official data (showing global reserves at
~36,359 tonnes as of September 2025), estimates suggest "unreported"
or "secret" purchases could add 500-1,000 tonnes annually, with WGC
adjustments often exceeding IMF figures by 20-30%.
Looking
ahead: US vs China-Decouple or Derisk?
·
The increasing
cold war between the two largest economies in the world (the US and China),
contributing almost 45% of the global economy, may lead to more geopolitical
fragmentation.
·
Both the US and
China are not trying for decoupling from each other, but trying for strategic
derisking.
·
China is now a
true superpower in terms of economy, military, and technology, virtually
overtaking America's monopoly.
·
USD is the
greatest weapon for America, has no permanent friends & enemies; only
interests
·
The US still has
the greatest geopolitical weapon in terms of the USD's global reserve currency
status; it has a virtual monopoly far ahead of the EUR and Chinese Yuan (CNY).
·
China is now
trying to plug this loophole by allowing CNY to appreciate against USD through
normal market pricing and also backing it with an increasing Gold reserve.
·
China is now
aiming for CNY as an alternative global trade currency to USD and thus going
for more Gold to increase the global trust in its paper currency.
·
Also, other
major BRICS nations are stockpiling Gold to strengthen the intrinsic value of
their paper currencies to fight against US bullying.
·
In reality, at
the end of the day, both the US and China are dependent and need each other for
development & prosperity despite occasional public acrimony and cold war
mentalities.
Quantitative
Analysis of Gold: Fair Value
Gold may be valued quantitatively using historical
M2 and inflation correlation, along with an additional premium for any
geopolitical issues. In that scenario, the Dec'25 fair value of gold is around $3976
(base case scenario) and a premium of 10% for current geopolitical & Fed
policy factors like Trump trade and Ukraine war, and Fed easing- the best case
scenario value may be around $4373; so far, Gold made a high around this level.
Bottom line
Gold
breached $4200 levels and is poised to scale $4300-4350 levels by Nov-Dec'25;
what's next?
·
We may soon have
a US-China trade & tech war truce extending beyond 2026 and possibly into
2029-30.
·
This, coupled
with the Gaza war ceasefire, Middle East peace, and a high potential Ukraine
war peace in the coming days, Gold may correct to some extent early 2026; watch
$4500 levels as a potential barrier!
·
China may
gradually buy gold officially, while also adjusting its unofficial holdings
through various proxies, keeping the gold price orderly.
·
Gold may not break
and sustain above $4500 in 2026 as geopolitical and Trump trade war premiums
may subside, although M2 and Inflation may surge.
Technical
outlook: Gold
Looking at
the chart, Technically Gold (CMP:
$4220) now has to sustain over 4255 for 4275/4300-4355/4380 and 4395-4405 for
4425/4455-4475/4500 to 4555-4575 and even 5000 zone in the coming days; otherwise
sustaining below 4245-4235, Gold may again fall to 4185/4125-4100/4080 and 4040*/4020-4000/3970
levels in the coming days.
Disclaimer:
·
I have no
position or plan to have any position in the above-mentioned financial
instruments/assets within the next 72 hours.
·
I am an
NSE-certified Level-2 market professional (Financial Analyst- Fundamental +
Technical) and not a SEBI/SEC-registered investment advisor.
·
The article is
purely educational and not a proxy for any trading/investment signal/advice.
·
Please always
consult with your personal financial advisor and do your own due diligence
before any investment/trading in the capital market.
·
I am a
professional analyst, signal provider, and content writer with over ten years
of experience.
·
All views
expressed in the blog are strictly personal and may not align with any
organization with which I may be associated.
·
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