How Much Gold Does China Hold? It Doesn’t Matter.

Chatter over China’s gold-buying spree is mounting. A few weeks ago, it was an academic curiosity. But then it inspired more and more coverage, with a slate of pieces today arguing this may spell the end of the dollar’s status as the world’s preferred reserve currency. In our view, that narrative is a vast, vast exaggeration. But also? The whole debate is time misspent, since the US doesn’t really get anything from the dollar being so widely used. For stocks, this is a sideshow of false fears.

The basic facts, as reported, are correct. China’s central bank has been buying gold, more than doubling its holdings from just under $71.5 billion in Q1 2016 to just shy of $150 billion at last year’s end—also doubling gold’s share of its total reserves from 2.16% to 4.33%.^[i] It also pared its US Treasury holdings over this span, from $1.24 trillion at the start to $816.3 billion when 2023 ended.^[ii] With other countries also raising gold holdings and tweaking the allocation of their foreign exchange reserves, the dollar’s total share of reserves is down from 65.5% in Q1 2016 to 58.5%.^[iii]

Yet demand for the dollar—and US Treasurys in particular—hasn’t caved. The total amount of dollars in forex reserves is up from nearly $5.1 trillion in Q1 2016 to $6.7 trillion in Q4 2023 (and peaked just over $7 trillion in 2021, likely tied to pandemic-related buying activity in 2020 and 2021). So dollar use is up in absolute terms while being a smaller share of a larger pie. Say it with us for emphasis: Dollar use in absolute terms is up, not down. This is as narratives seem to constantly bubble up arguing its days as the global reserve currency of choice are numbered.

While countries do hold more gold these days, they also hold more liquid forex reserves—even China has more now than it did in 2016, with its war chest topping $3.3 trillion.^[iv] Meanwhile, foreign entities owned nearly $6.2 trillion of US Treasury securities in Q1 2016—and $7.94 trillion in December 2023.^[v] And having a smaller share of reserves hasn’t taken a toll on the dollar’s exchange rate, which remains near all-time highs versus a broad, trade-weighted currency basket.^[vi]

Here, you might point out that while the dollar is up, so are long-term US Treasury yields—playing into the widespread belief low borrowing costs are the “exorbitant privilege” the US reaps from having the world’s favorite reserve currency. But beware correlation without causation. Yes, US rates are up, but this is a global trend. The British pound’s share of reserve assets held pretty steady, but UK long rates are up. Ditto the euro’s share and rates across the eurozone. The yen’s share of reserves is up a couple percentage points, but even Japanese long rates have risen as the Bank of Japan loosened its artificial ceiling. Seems to us reserve currency use and long rates aren’t linked. The privilege is a myth … fiction.

We also see a blind spot in the general reasoning that decreased reserve use would hit Treasurys and the dollar. As many of the recent articles point out, gold’s rising role in the reserve asset pool is a change from 25 years ago, when most developed nations were selling down gold reserves in favor of more liquid and stable forex reserves. These pieces note, usually with some scorn, that these sales happened just before gold went on a tear in the 2000s, making the sales look awful from a market-timing standpoint.

But think through this: The rise that makes that sale timing look poor clearly means lower reserve demand didn’t dent gold in the years that followed—it seemingly didn’t factor at all. Therefore, we don’t see why it would suddenly be different for US Treasurys.

Treasury demand is much broader and includes a host of investors globally, not just foreign governments. If they buy less, there is more for individuals, pension funds, banks, you name it. You can see this plainly in the Treasury’s report of major foreign holdings of US Treasurys. Even as total foreign ownership rose, holdings in the official sector fell. But other buyers stepped up, and total demand soared. Which doesn’t surprise, considering why entities own bonds and the fact that US Treasury markets are the world’s deepest, broadest and most liquid.

With all this said, the US doesn’t really get anything wonderful from having the world’s preferred reserve asset. No interest rate discounts, no brokerage fees, not even a celebratory plaque.^[vii] The Treasury doesn’t earn commissions on every international transaction conducted in dollars. OK, maybe it gives sanctions some added heft, but even that is debatable, which Russia’s unfortunate success in dodging them over the last two years illustrates.

From a global standpoint, it is probably no bad thing that countries are diversifying their reserve piles a bit, giving them more flexibility and more tools to manage things. This is all just really boring plumbing stuff. It is also the kind of long-running false fear that is bound to resurge again and again when sentiment is skeptical and society wants a worry to chew over. But markets know the difference between cud-chewing and actual risks in waiting, and they rightly moved on from this one a long time ago.