Some interesting recent data remind us of the importance of paying attention to what governments actually do, not just what they say.

Central banks are on a gold-buying spree, and they are using their U.S. dollar foreign reserves to fund it. According to a report by the World Gold Council, central banks have bought more than 700 tons of gold year to date through October 2022—four times more than in 2021 and more than any annual period in more than 50 years—and the pace is accelerating. Central banks, for example, have acquired 400 metric tons of gold (worth about US$23 billion) during the third quarter of 2022 alone.

As much as 300 tons (75 percent) of the third-quarter volume remains unaccounted for, in that no central bank has claimed credit for the purchases, despite such a massive and unprecedented move. One prominent Japanese media outlet suggests they know who the buyer is: China.

According to a recent report by Nikkei Asia, the People’s Bank of China (PBC) is likely the mystery buyer of most if not all of the 300 tons, potentially including purchases from Russia’s 2,000-ton stockpile. In early December, China’s central bank, the sixth-largest holder of gold in the world, acknowledged buying 32 tons in November. This was the first time in more than three years that the PBC has provided any information to the public on its gold purchases, but there’s skepticism that China is still not reporting the real number.

Despite all the talk from government officials on fighting inflation, central banks are aggressively moving their foreign reserves into gold. Why would they do this? Isn’t gold the “barbarous relic” of times long past, a non-productive asset with no place in a modern monetary system? Apparently, the central banks don’t think so.

There are at least two reasons central banks are selling foreign reserves and stockpiling gold: first, they know that inflation is not going away anytime soon, imperiling the value of fiat currencies held as foreign reserves, and, perhaps more importantly, they recognize the real possibility that the U.S. dollar’s reign may be coming to an end. For countries like China, nothing could make them happier.

Simply put, China and its allies are in de-dollarization mode, selling U.S. Treasury bonds as quickly as they can without disrupting the market while simultaneously buying gold and other hard assets.

Indeed, U.S. Treasury data show that China has sold $114 billion of U.S. Treasurys over the past year, representing approximately 11 percent of its holdings as of September 2021. China appears to have started a trend. At the same time as China’s U.S. dollar divestitures, China’s neighbors in Asia have also been busy selling U.S. Treasury securities. Eight Asian entities have all been sellers: China, Hong Kong, Japan, South Korea, Singapore, Taiwan, Thailand, and Vietnam. Collectively, they represented 43 percent of all U.S. Treasuries held by foreign holders as of September 2021. They have since net sold $427.5 billion of U.S. Treasurys, an amount which represents 145 percent of the total net reduction of $294 billion of U.S. Treasurys held in foreign hands.

Most of Western Europe and the Middle East have also reduced their exposure, albeit in smaller amounts, so as to not overly shock their American allies and to ensure an orderly market. The United States has been able to strong-arm some of its allies into taking its paper. Both the United Kingdom and Belgium (presumably EU-related official holders) have acquired approximately $100 billion each, while Canada has bought $30 billion, tempering the blow to the U.S. Treasury.

Is this a sign of more selling to come, or will China continue to support the debt of one of its primary competitors and an increasingly stressed debtor? Economically, it is still in China’s interest to do so, because financing U.S. debt enables America to continue to acquire Chinese goods. This is necessary to keep China’s economy growing and stave off the domestic unrest that could challenge the leadership position of the Chinese Communist Party (CCP). China remains one of the largest creditors to the United States and must be careful lest it collapse the value of its own holdings. So the CCP face a dilemma here that is unlikely to be resolved anytime soon.

However, the long-term trend is clear. China wants to move away from the U.S.-dominated world order. To do this, China needs to have a backstop to protect itself from the eventual demise of the U.S. dollar’s reserve status. For the moment, gold appears to be a part of China’s strategy.