Since the beginning of human civilization, people around the world have been captivated by gold. However, ever since the United States expelled gold from its monetary system over 50 years ago, U.S. Treasury bonds, which have replaced gold as the global anchor for asset prices, have become the international core reserve asset for central banks worldwide. Most monetary authorities maintain the stability of their total international reserves and ratios, not in gold, but in U.S. Treasury bonds.

Yet, just as many believed that the role of gold in the monetary system had come to an end, recent developments in the U.S. Treasury bond and gold markets have surprised investors. What is the core logic behind this?

According to the American financial website ZeroHedge on August 5th, citing an updated proposal (HB98291) introduced in the state of Kansas, the state unexpectedly formally legislated to make gold and silver legal tenders alongside the U.S. dollar, beginning to perform the general equivalent function in the commodity trading process, and abolished the gold gains tax and eliminated all tax obligations on gold and silver in the state.

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At the same time, more regions in the United States are beginning to respond. States including Utah, Maine, Idaho, Oklahoma, Virginia, Tennessee, and Arizona are also accelerating legislation to make gold and silver legal trading currencies.

Not only that, but what surprised the market even more is that despite the U.S. consumer confidence index dropping to the second lowest in history in July (the consumer confidence index final value rose from the historical low of 50 in June to 51.5), the U.S. gold and silver coin market has unexpectedly remained strong for several months.

According to data released by the U.S. Mint on August 6th, the total sales volume of gold coins (including the American Buffalo gold coins) in July reached as high as 104,000 ounces. If calculated based on this sales data, the annual sales volume of gold coins in 2022 is likely to exceed the 1.6 million ounces of 2021, estimated to reach 1.9 million ounces, potentially becoming the strongest year for U.S. gold coin sales since the record of 2.1 million ounces set in 1999.

The World Gold Council explained in a report published on August 5th that the reason behind this is that Americans have started to hoard gold and gold coins to hedge against high inflation and the rapid decline in the purchasing power of the U.S. dollar (please note that this is different from the U.S. Dollar Index), reflecting the American public's growing doubts about whether the U.S. dollar can continue to serve as a long-term means of wealth storage.

As the BWC Chinese International Financial Research Team emphasized, even if the action taken by Kansas cannot end the issuance mechanism of the U.S. dollar anchored to U.S. Treasury bonds, the policy change in multiple U.S. states recognizing gold as having the same monetary status as the U.S. dollar may have a profound impact on U.S. Treasury bonds and the U.S. dollar.

The core logic here is that the current macroeconomic environment in the United States is characterized by a surge in monetized debt and currency devaluation, leading to great inflation. Although the U.S. Treasury and the Federal Reserve believe they can control this process, monetary historical experience tells us that they cannot, and the Federal Reserve cannot print gold.

We have emphasized on various occasions that the persistent high inflation in the United States at a 40-year high has forced the Federal Reserve to adopt aggressive interest rate hike policies to salvage its credibility, which is the biggest tail risk facing U.S. Treasury bonds. As the ability of high inflation to hedge debt interest declines, coupled with the increase in debt cost expenditures after interest rates rise, the U.S. Treasury and the Federal Reserve may lose their ability to rescue their own debt. This has also led foreign central banks to start selling dollar-denominated assets, with the share of U.S. Treasury bonds continuing to decline.Because, with inflation at a 40-year high of over 9%, the real yield becomes negative, leading to losses when purchasing U.S. Treasury bonds adjusted for monthly inflation. This is against the backdrop of the Federal Reserve increasing its quantitative tightening efforts starting in August, reducing the scale of U.S. Treasury bond purchases (from $65 billion in June to $95 billion). Under these circumstances, investment demand from these cornerstone-level major buyers of U.S. Treasury bonds has shifted.

Subsequently, a report published by Goldman Sachs on August 6 also believes that since the dollar decoupled from gold and entered the era of credit paper money, the dollar has essentially embarked on a continuous decline in its historical process. At the same time, its influence and control over the world have also sharply declined. The attractiveness of U.S. Treasury bonds relative to alternatives and foreign bonds is weakening, and a sharp drop in foreign demand for U.S. Treasury bonds should be seen in the next few quarters.

According to the latest data monitored by Bloomberg, within the 10 weeks ending August 1, the net outflow of funds from the U.S. Treasury bond market has risen to $185.2 billion. We have noticed that the latest position data released by the U.S. Treasury Department has already reflected the continuous decline in the proportion of U.S. Treasury bonds among various monetary authorities.

According to the latest report on international capital flows released by the U.S. Treasury Department in July (the official position data of U.S. Treasury bonds has a two-month delay, and the next report will be released in mid-August), it is not only Japan, Saudi Arabia, and Israel, as economic allies of the United States, that are continuously liquidating U.S. Treasury bonds. It also includes more than 20 major overseas holders of U.S. Treasury bonds, such as China, Luxembourg, Switzerland, India, South Korea, Germany, France, and Canada, who have all sold U.S. Treasury bonds to varying degrees.

Global official institutions have been net sellers for 38 out of the past 48 months, with a total net sale of $237.2 billion in U.S. Treasury bonds since 2022, which is 1.3 times more than the total sales in the previous two months and the largest monthly sales scale in two years.

The report also shows that since December 2021, China has reduced its holdings of U.S. Treasury bonds by $100.1 billion in six consecutive months, bringing its position to the lowest in twelve years, with holdings less than one trillion. Moreover, China has maintained the largest selling force of U.S. Treasury bonds in the past two months. At this time, another unexpected event for investors has occurred in the global financial market.

According to the "Global Gold Demand Trend Report" for the second quarter of 2022 released by the World Gold Council on August 5, China's gold demand in July was strong. China's gold ETFs accounted for all the inflows in the Asian region in July, with a strong inflow of 8.1 tons. This also indicates that China is sending a signal to the global market to increase the import of gold, which is unexpected for investors.

Based on the data released by the World Gold Council, we have found that in the first five months of 2022, China's total gold imports have reached 282 tons, only 60 tons lower than the same period in 2019, and the gold imports in 2021 reached as high as 818 tons, a 36% increase from 601 tons in 2020. This also means that so far this year, China's gold imports are still much higher than the same period in 2021 and 2020, which has been confirmed by the council's latest gold demand report.

In addition, according to the data cited by Reuters on August 2, in June, China's gold imports from abroad soared nearly four times to 40.563 tons compared to the same period. At the same time, in June, the total amount of gold imported by China from abroad also jumped nearly 208%, reaching 43.587 tons. However, this is not the end of the story.

Subsequently, according to the latest industry data released by Swiss and Dubai customs cited by the U.S. financial website Zerohedge on August 3, about 215 tons of gold were shipped from Europe and America to China in July. In fact, since China resumed gold imports, Switzerland's gold exports to China have increased significantly since 2021 to the highest level in the past five years. In the past 20 years, more than 6,700 tons of gold have been shipped to China through foreign markets alone.According to data released by Swiss customs on August 1st, it is also shown that from March to July this year, Switzerland's gold exports to the US market have risen sharply to the highest level since 2012. Switzerland is the world's largest gold refining and transit center.

At the same time, the Federal Reserve hopes to maintain the credibility and monetary status of the US dollar and does not dare to prevent countries from taking back their own gold. As explained in the latest report by the World Gold Council, central banks around the world know that the US dollar will lose its dominant currency status sooner or later. It is obvious that at present, gold is no longer a marginal asset and is regaining its financial attributes.