Taking into account the 106 tons the country purchased in the first half of the year, Russia’s gold reserve has now exceeded 2,036 tons, worth around 78 billion dollars.
Russia thus entered the top five gold-holding nations, surpassed only by the US, whose reserve accounts for 8,133.5 tons, Germany with its 3369.7 tons, Italy (2,451.8 tons) and France (2,436 tons.)
If Russia continues its purchases at the same pace, it will overtake France by 2020, whereas the Central Bank seems to be set to increase its gold reserve in light of the Central Bank’s First Deputy Head Dmitry Tulin branding the asset “a 100 percent guarantee against legal and political risks.”
Meanwhile, the status as some of the most active buyers of gold has recently been claimed by Turkey and China –countries that have lately had a tense relationship with the United States.
They have also become major vendors of US Treasury securities over the course of the year, with Russia having cut its investments in the US national debt to 1/8 of what it was previously.
Investors’ negative expectations are also reflected in a recent poll of 174 investment fund managers, whose total assets amount to 518 billion dollars.
The poll was conducted by the Bank of America (BofA). The respondents said that over the last couple of months, they had reduced the amount of US stocks by 17 percent on average, due to the increased volatility of the country’s markets.
The aluminum and steel tariffs, as well as Chinese import limitations introduced by Donald Trump earlier this year, have already had an adverse effect on the quarterly financial statements of major American companies, 3M and Caterpillar in particular.
Separately, the trade war with China has led to an upheaval for US farmers, after Beijing curbed its purchases of US agricultural produce in response to the tariffs.
Prices for soy beans have since dipped by 18 percent, corn is selling at 12 percent cheaper, and pork has gone down in price by as much as 29 percent.
31 percent of investment fund managers consider the Federal Reserve’s policies to be the second biggest risk.
“By increasing interest rates for dollar loans, the Federal Reserve simultaneously steps up the pace of the retrieval of the 3.5 trillion dollars, poured into international markets after the 2008 crunch,” chief economist at ING Bank James Knightley pointed out.
“Since October, the volume of operations aimed at reducing the balance has grown to 50 billion dollars per month: the Federal Reserve will balance Treasury bonds worth 30 billion dollars, and mortgage ones worth 20 billion.”
As of the end of July, China has 1.2 trillion dollars’ worth of US national debt stocks.
By dumping the stocks into the market, Beijing is believed to thereby doom the American economy to a new financial crisis, with the dollar expected to go down in price.
Therefore, on the threshold of new economic upheavals, both investors and central banks are continuing to rely on good old gold.
The U.S. debt to China is $1.17 trillion as of August 2018.
That’s 19 percent of the $6.3 trillion in Treasury bills, notes, and bonds held by foreign countries.
The rest of the $21 trillion national debt is ownedby either the American people or by the U.S. government itself.
How China Became One of America’s Biggest Bankers
China is more than happy to own almost a fifth of the U.S. debt owned by foreigners. Owning U.S. Treasury notes helps China’s economy grow.
It keeps the yuan weak relative to the dollar. As a result, Chinese exports are less expensive than U.S. products. China’s highest priority is creating enough jobs for its 1.4 billion people.
The United States allowed China to become one of its biggest bankers because the American people enjoy low consumer prices. Selling debt to China pays for federal spending that spurs U.S. economic growth.
It also keeps U.S. interest rates low. But China’s ownership of the U.S. debt is shifting the economic balance of power in its favor.
Why China Owns So Much U.S. Debt
China makes sure the yuan is always low relative to the U.S. dollar. Why?
Part of its economic strategy is to keep its export prices competitive.
It does this by holding the yuan at a fixed rate compared to a “currency basket” of which the majority is the dollar.
When the dollar falls in value, the Chinese government uses dollars it has on hand to buy Treasuries.
It receives these dollars from Chinese companies that receive them as payments for their exports.
China’s Treasury purchases increase demand for the dollar and thus its value.
China’s position as America’s largest banker gives it some political leverage.
Now and then, China threatens to sell part of its debt holdings.
It knows that if it does, U.S. interest rates would rise, slowing U.S economic growth.
China often calls for a new global currency to replace the dollar, which is used in most international transactions.
China does this whenever the United States allows the value of the dollar to drop. That makes the debt China holds less valuable.
What Happens If China Called in Its Debt Holdings
China would not call in its debt all at once. If it did, the demand for the dollar would plummet.
This dollar collapse would disrupt international markets even more than the 2008 financial crisis. China’s economy would suffer along with everyone else’s.
It’s more likely that China would slowly begin selling off its Treasury holdings.
Even when it just warns that it plans to do so, dollar demand starts to drop.
That hurts China’s competitiveness. As it raises its export prices, U.S. consumers would buy American products instead.
China could only start this process if it further expands its exports to other Asian countries and increases domestic demand.
China’s Debt-Holder Strategy Is Working
China’s low-cost competitive strategy worked. Its economy grew 10 percent annually for the three decades before the recession.
As of 2018, it’s growing at nearly 7 percent, a more sustainable rate.
China has become the largest economy in the world, outpacing the United States and the European Union. China also became the world’s biggest exporter in 2010.
China needs this growth to raise its low standard of living.
Despite its threats, China will continue to be one of the world’s largest holders of U.S. debt.
