U.S. government debt has exceeded $40 trillion for the first time, once again raising investor concerns about the sustainability of American public finances. At the same time, yields on long-term U.S. government bonds recently climbed to levels near their highest in almost 20 years, while the U.S. Treasury had to increase its buyback operations to support market liquidity.
Against this backdrop, gold (XAUUSD) received a new boost. On August 19, XAUUSD rose by more than4%, while on August 20 the price climbed as high as $4,527per ounce — its highest level since early June.
Why gold is attracting more institutional capital again:
Foreign demand for U.S. government debt is declining. In June, foreign investors' holdings of U.S. government bonds fell from $9.371 trillion to $9.299 trillion. China reduced its holdings by as much as 4% to $633.4 billion, the lowest level since September 2008. Japan and the United Kingdom also reduced their positions.
Private investors are becoming more cautious as well. Net purchases of U.S. government bonds by the foreign private sector over the past 12 months have fallen by more than 40%. This does not mean a mass rejection of the U.S. dollar, but it does indicate that attracting funds to finance America's growing debt is becoming more difficult.
China is accelerating its gold accumulation. In July, the People's Bank of China increased its reserves by 20 tons — the largest monthly increase in almost three years. As a result, the country's official gold reserves reached a record 2,377.5 tons.
China is not the only buyer. In the second quarter, central banks around the world purchased around 289 tons of gold — a record figure for the second quarter. In the first half of the year, the largest buyers included Poland, Uzbekistan, China, and Kazakhstan.
The reason for this diversification is becoming increasingly clear. Government bonds and currency reserves depend on the financial system of the issuing country and, amid geopolitical conflicts, can become instruments of sanctions or economic pressure. Physical gold is not another country's debt obligation, which is why it remains a way for central banks to reduce currency, credit, and political risks.
This trend is likely to continue. According to a World Gold Council survey,89% of central banks expect global gold reserves to increase further,while a record 45% plan to increase their own holdings. At the same time, 74% of respondents believe the dollar's share of international reserves will decline over the next five years.
According to FreshForex analysts,the key factor for XAUUSD right now is not so much short-term price dynamics as the changing structure of global reserves. Reduced holdings of U.S. government debt by some major holders, combined with sustained gold purchases by central banks, show that the metal is increasingly being viewed as a long-term diversification instrument.
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