Is China Selling U.S. Assets To Buy Gold?

Key Insights

• U.S. Treasury data indicates that China is selling U.S. assets at a robust pace. 
• Some observers believe that China tries to provide support to its currency. 
• However, China may be selling U.S. assets due to geopolitical tensions. In this scenario, China could increase its gold purchases in the upcoming months. 

According to the recent data from U.S. Treasury, Chinese investors sold $21.2 billion 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%.

I have recently written that high Treasury yields may serve as an additional bullish catalyst for gold. Traders are searching for safe-haven assets due to geopolitical tensions. 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 direct their funds to gold markets. There are two main theories about the reasons of China’s rapid selling of U.S. assets.

First, China needs to support the local currency, 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. Selling dollar-denominated assets to provide support to yuan makes perfect sense. If China is selling U.S. assets to prop up its local currency, gold will get limited support.

The second potential reason for China’s activity lies in the realm of geopolitics. U.S. – China relations 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. Gold is one of the few markets that has sufficient liquidity to absorb billions of dollars of China’s funds.

Usually, China moves slowly, so we will see whether the country decided to boost its gold holdings sometime in the first half of the next year. Any signs showing China decided to increase its gold reserves will be bullish for gold and may send its price towards new highs.

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