There's More to China's U.S. Debt-Dumping Rush Than Meets the Eye

Unprintable Alternative to Debt, De-Dollarization, Not Just China, Leaving the West for the East

"Gold is money. Everything else is credit."

~ J. P. Morgan

Earlier this week, I told you how China has accelerated its de-dollarization efforts with rapid-fire sales of U.S. debt.

The country offloaded $53.3 billion worth of U.S. Treasuries and U.S. agency bonds. This is the largest single sale of U.S. debt in its history.

But, as I explained, even U.S. allies like Belgium and Switzerland have recently dumped an impressive $20 billion and $43 billion worth of Treasuries, respectively.

If this trend keeps up, it could be a big problem for the U.S. government. That’s because about one-third of its debt, or $8 trillion, is held by foreign countries.

The Unprintable Alternative

Now, the main reason foreigners own such a large portion of U.S. debt is simple: the U.S. dollar is the world's primary reserve currency.

Currently, central banks hold about 58% of their foreign reserves in U.S. dollars. To earn returns on all this cash, they invest it in U.S. Treasuries, which are considered the safest assets in the world.

There’s just no alternative… or is there?

Well, China certainly seems to think so.

Just take a look at the next graph showing China’s holdings of U.S. Treasuries and gold as a percentage of its foreign reserves since 2015.

The chart above shows that as China cut back on U.S. debt, it ramped up its gold purchases. This inverse relationship between China's gold and U.S. debt holdings became really noticeable around 2018, when the trade war with the U.S. kicked off. And as I mentioned in my last essay, by 2019, China had given up its spot as the biggest holder of U.S. debt to Japan.

And it's been buying gold like crazy ever since. In fact, April marked the 18th month in a row that China’s central bank had been adding gold to its reserves.

Keep in mind, it's pretty unusual for a central bank to keep buying gold for such a long stretch. Usually, they buy some and sell some to keep their asset mix balanced.

But China clearly isn't following the usual playbook.

In 2015, gold was just 1.6% of its total foreign exchange reserves. Today, it’s about 4.5%. That’s a massive shift.

Right now, the People’s Bank of China (PBOC) officially holds about 2,263 metric tonnes of gold, or 72.74 million troy ounces. Back in 2015, it “only” had roughly 1,658 metric tonnes, or 53.3 million troy ounces. That’s a staggering 37% increase in less than a decade.

But China reportedly also holds gold that’s not reflected in the official data. This means that their actual gold reserves are likely much larger.

The Gold Exodus

But here’s the important part…

The trend of selling Treasuries and buying gold isn’t just happening in China. Other countries are doing it too. Take a look at the next chart.

The share of gold in the forex reserves of “China-leaning” countries has been going up. Meanwhile, the share of gold in the FX reserves of “U.S.-leaning” countries has been going down.

Note: The “U.S.-leaning” countries mainly include Europe, Canada, Australia, and New Zealand, while “China-leaning” countries include Russia, Eritrea, Mali, Nicaragua, Syria, and several others.

This is the gold exodus from the West to the East that media talking heads don't like to talk about.

And if you look at the chart above, you can see how it really sped up after the U.S. hit Russia with sanctions in 2014.

For many countries looking on, that was the first red flag. Suddenly they realized that if their foreign policy is not aligned with that of the U.S., they will be sanctioned into oblivion. So, they started getting away from the greenback and and toward gold. Ever since, the more gold "U.S.-leaning countries" sold, the more gold "China-leaning countries" bought.

Doug Casey: The major asset of the world’s central banks is U.S. dollars. Even though central bankers aren’t rocket scientists, they recognize that the dollar is the just the unsecured asset of a bankrupt government, the U.S. government. So the Russians and the Chinese are trying to lighten up on dollars and go to gold. Other governments and central banks will too.

Take Russia again, for example. They've shifted about 20% of their reserves into gold thanks to this shift. Meanwhile, their reported stash of Treasuries nosedived from $96 billion in 2014 to around $10 billion today. That has coincided with a drop in the dollar's share of Russia’s reserves from about 50% to just around 10%.

Collectively, “China-leaning" countries now hold about 7% of their reserves in gold, compared to the 4.5% held by "U.S.-leaning" countries.

Bottom line: de-dollarization is already well underway. And now that the collective West is swooping in to grab billions in Russian assets, it will go into overdrive.

No doubt, the dollar won’t lose its top reserve currency status overnight. But it will happen sooner than most people think. And when it does, America is in for a rough ride.

Regards,

Lau Vegys

P.S. Protecting yourself from this crisis is simple: convert as much government currency units as you can into gold. The metal’s track record speaks for itself, which is why Doug always recommends holding it in your long-term investment portfolio. That's also why a big part of our Crisis Investing portfolio is focused on these stocks, which Doug himself owns.