Since China’s gold share of official reserves remains relatively low, the People’s Bank of China retains strong incentives to continue accumulation. Photo: IC PHOTO

According to official reserve data released by the State Administration of Foreign Exchange on Aug. 7, 2025, China’s gold reserves stood at 73.96 million ounces at the end of July, an increase of 60,000 ounces from the previous month. This marked the ninth consecutive month of accumulation since China resumed gold purchases in November 2024. Over the same period, the international gold price rose from USD 2,651.19 per ounce in November 2024 to USD 3,298.88 per ounce in July 2025, based on official reserve levels and prevailing market prices in US dollars. Traditionally, central banks expand holdings during price dips, yet the People’s Bank of China (PBOC) has continued to increase its reserves even amid a rising price cycle. This raises several questions: What is the underlying rationale for these purchases? What factors shape international gold prices? And what are the prospective trajectories of international gold prices and China’s gold reserves?

Main reasons of expanding holdings

From a longer-term perspective, China’s sustained accumulation of gold since November 2024 is not without precedent. Since the PBOC began publishing its gold holdings in 2016, only three years—2017, 2020, and 2021—saw no increase. In fact, 2023 recorded the largest annual rise, at 7.23 million ounces. The PBOC’s expansion of gold holdings is driven mainly by several considerations.

A key motivation is the need to diversify reserve assets. Empirical research has demonstrated that gold exhibits very low, and sometimes negative, correlations with other asset classes, making it an important component of a well-balanced investment portfolio. An appropriate allocation to gold contributes to lower risk and higher returns. As the US dollar has weakened, undermining its absolute dominance as the global reserve currency, an expansion of PBOC’s gold reserves helps optimize China’s reserve structure. Gold accounts for a substantial share of official reserves in many countries: As of June 2025, gold represented 77.47% of Germany’s reserves, 74.88% of France’s, 66.28% of the Eurozone’s, 13.14% of the United Kingdom’s, 4.34% of the United States’ (May 2025), 36.11% of Russia’s, and 11.70% of India’s (March 2025). By comparison, China’s ratio stood at 7.32%, significantly lower than Eurozone economies, and even lower than Russia, the UK, and India.

Another rationale is the need to preserve and enhance reserve value. Gold’s return distribution is positively skewed, and given its inherent intrinsic value, it serves as an effective store of wealth. From a historical perspective, despite fluctuations, gold prices have generally trended upward. Notably, during three major periods—the collapse of the Bretton Woods system to 1980, the global financial crisis to 2011, and the COVID-19 pandemic onward—prices surged significantly. From approximately USD 35 per ounce in early 1968, gold rose to around USD 3,413 per ounce in the London spot market by July 23, 2025.

The PBOC’s decision to expand holdings during a period of rising prices is largely attributable to expectations of further appreciation. In recent years, the Russia-Ukraine conflict, the Israel-Iran conflict, and persistently high geopolitical risks in the Middle East, along with actions such as the Trump administration’s “reciprocal tariffs” and airstrikes against Houthi forces, have impacted the global geopolitical economy. Gold’s appeal as a safe-haven has increased accordingly, creating significant room for international gold prices to rise. Against this backdrop, continued purchases of gold reserves appear both rational and strategically sound.

A stronger gold reserve base also enhances China’s capacity to meet external obligations and maintain currency stability. As an important component of a country’s official reserves, gold, like foreign exchange and Special Drawing Rights (SDRs), can be used for international payments and the settlement of external debts. The gold reserves officially held by countries can serve as reserves for international payments. The larger the scale of gold reserves, the stronger a country’s capacity to repay external debts. In addition, strong gold reserves can enhance market confidence in the central bank’s ability to maintain the stability of domestic currency’s value and exert a strong deterrent against speculative attacks. When intervention in the foreign exchange market is needed to stabilize the currency’s value, gold reserves help strengthen borrowing and financing capacity in both domestic and foreign currencies, thereby reinforcing the capacity to intervene in exchange rates and maintain currency stability. As the renminbi advances in its important process of internationalization, robust gold reserves are essential to providing both material support and credit backing.

Gold reserves also symbolize national strength and constitute a critical component of strategic reserves. Major economies maintain substantial quantities of gold: As of the end of 2024, the United States, France, Germany, Italy, Switzerland, and the European Union held 8,133.46 tons, 2,437 tons, 3,351.53 tons, 2,451.84 tons, 1,039.94 tons, and 10,765.3 tons, respectively; the International Monetary Fund held 2,814 tons, and China held 2,279.6 tons. Compared with the United States and the European Union, China’s gold reserves are still not commensurate with its economic strength.

As an important component of a nation’s strategic reserves, gold can enhance national liquidity in times of emergency. As a universally accepted means of payment, gold can also be used as collateral, improving a nation’s access to liquidity. Therefore, given the heightened uncertainty of US foreign policy during the “Trump 2.0” period, it is necessary for China to continue expanding its gold reserves to safeguard national economic and financial security.

Determinants and outlook of international gold prices

Studies have found that gold exhibits three interrelated attributes—financial, commodity, and safe-haven—which jointly determine price dynamics.

In the long run, gold’s intrinsic value is shaped by sovereign monetary issuance. When monetary expansion outpaces economic growth, currency values decline, and the price of gold, as the universal equivalent, rises. Since moderate inflation supports economic growth, broad money supply growth tends to exceed GDP growth, leading to a structural upward trend in gold prices. Historical price data confirm this trajectory: Fitting a trend line to daily gold prices (London spot, USD/oz, Jan. 2, 1968–July 23, 2025) reveals a clear long-term upward trend.

Over the medium term, gold prices are influenced by supply and demand dynamics, including production, central bank demand, and consumption demand. Since 2015, global gold production has remained relatively stable, fluctuating between 3,000 and 3,300 tons annually. On the demand side, jewelry accounts for the largest share, followed by investment demand and industrial use. In 2024, these categories accounted for 40.28%, 23.71%, and 6.55% of total demand, respectively. While investment demand is more volatile, jewelry and industrial demand remain relatively stable. This balance between supply and demand supports a relatively stable medium-term price trend.

In the short term, safe-haven demand is the dominant driver. Geopolitical shocks, inflation risks, monetary policy changes, and shifts in alternative investment opportunities all generate volatility. Geopolitical crises typically trigger price spikes due to gold’s role as a safe-haven asset. Similarly, rising inflation expectations drive gold upward, while falling stock markets or bond yields increase its appeal. Conversely, because gold yields no interest, higher rates raise its opportunity cost, exerting downward pressure on prices.

In the current global context, US tariff policies have heightened economic uncertainty of the United States, pressuring stock, bond, and currency markets and driving risk aversion—strengthening short-term demand for gold. In the medium term, reciprocal tariffs have pushed up inflation in the United States, leaving the Federal Reserve torn between raising and lowering interest rates. Rising global currency volatility, together with uncertainties in the Trump administration’s foreign policies, will continue to contribute to higher gold demand, with prices likely to rise further. Studies suggest that the US fiscal deficit will weigh on creditworthiness in the long run, with the financial attributes of gold supporting an upward price trend.

Given expectations of continued increases in international gold prices, the weakening dominance of the US dollar as a global reserve currency, and the ongoing optimization of central bank reserve structures worldwide, demand for gold is likely to remain strong. In 2024, global central banks purchased 1,045 tons of gold, marking the third consecutive year of net purchases exceeding 1,000 tons. Since China’s gold share of official reserves remains relatively low, the PBOC retains strong incentives to continue accumulation—whether to optimize the reserve asset structure, preserve and increase the value of reserve assets, or support the internationalization of the renminbi.

Hu Zaiyong is a professor from the School of International Economics at China Foreign Affairs University.