We’ve been following the story of Chinese gold purchases for over 10 years. It was in March 2009 that I first proposed China was acquiring gold for geopolitical and strategic reasons and not merely for monetary reasons. I did this at a Pentagon-sponsored financial war game at a top-secret weapons laboratory that I both facilitated and participated in.

At the time, China had about 600 tons of gold. I suggested that Chinese purchases of gold would expand and persist with a view to creating a new gold-backed currency that could gradually displace the dollar as the global reserve currency. More recently, it also became apparent that a new gold-backed digital currency sponsored by China could help it escape U.S. sanctions that are imposed through the dollar payments system.

Since 2009, events have played out exactly as I forecast in 2009. China has more than tripled its gold reserves from 600 tons to almost 2,000 tons. It’s likely China has even more gold “off the books” in the State Administration of Foreign Exchange (SAFE), a Chinese sovereign wealth fund that acts as an alternative to the People’s Bank of China when it comes to managing reserves, including gold.

With this as background, it came as a shock to read this article that reports China is strictly limiting gold imports. Yet there are important reasons for this import ban notwithstanding China’s voracious appetite for gold.

The first is that China is the world’s largest gold producer (about 500 tons per year), so it can continue to acquire gold internally even without imports. The second is that China is facing a severe dollar shortage due to contracting world trade and U.S. tariffs.

China has enormous dollar-denominated debts, so it needs to preserve its dollar reserves to repay those debts. Cutting back on dollar-denominated imports of gold is one way to do that. Finally, China fears a drain on its capital account as Chinese tycoons try to get their money out of a collapsing economy or buy assets that will retain value (and can be smuggled without using wire transfers).

China still wants gold, but it has more immediate problems with reserves and capital flows. Ironically, this stress in China is bullish for gold even if China itself reduces imports. There are plenty of other buyers in line.

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