It almost feels like anything China touches turns to gold for ASX share investors. You only need to look at what Chinese demand for iron ore and infant milk powered has done for the Rio Tinto Limited (ASX: RIO) share price and A2 Milk Company Ltd (ASX: A2M) share price.
The next group of stocks that may benefit from the Asian Midas Touch could be our gold producers as the Chinese central bank continued to buy the precious metal for the sixth consecutive month in May, according to multiple news reports.
China buying gold
Central bankers from Australia’s most important trading partner snapped up close to 16 tonnes of gold last month to take its gold reserves to 61.6 million tonnes. They’ve bought 74 tonnes of gold since the end of November, according to precious metal trader Kitco.
“China’s total foreign-exchange reserves climbed $6 billion in May to $3.101 trillion, according to data from the central bank,” said Kitco.
“In dollar terms, China’s gold reserves rose to $79.83 billion in May from $78.35 billion in April.”
What’s more, the Chinese aren’t the only ones adding to their gold reserves. Global central banks have been net buyers of the commodity and have collectively increased their holdings by 651.5 tonnes in 2018 – which the World Gold Council data indicates is the most in nearly 50 years.
Trade war is good for gold
I suspect we will see this trend continue and it’s probably largely due to US President Donald Trump. The US dollar is the reserve currency of the world but Trump’s volatile policies has weakened the status of the greenback, in my opinion.
It’s hard to view the US currency as a safe harbour when the country’s president is causing the turmoil as he weaponises trade tariffs to get the world to bend to his bidding.
Throw in the fact that markets have fully priced in one or two rate cuts from the US Federal Reserve, and you can see why the US dollar may continue to trade on the backfoot, particularly as the bond market indicates a likely US recession over the next 18 months.
In this uncertain environment, gold is likely to shine brighter than other safe haven assets, particularly given the falling interest rate environment we find ourselves in.
Gold better than cash
If the interest payments on term and bank deposits are sitting under inflation (and the vast majority of these accounts are), it’s better to be in gold as the value of the commodity tends to rise with inflation (all things being equal).
Those who don’t have any gold exposure in their portfolio may want to add some as the macroeconomic storms that have buffeted global markets are likely to abate anytime soon!
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Motley Fool contributor Brendon Lau owns shares of Rio Tinto Ltd. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.