(Kitco News) – China’s central bank continues to see the value of diversifying into gold as it continues to purchase the precious metal on a monthly basis in the midst of falling total reserves.

According to media reports, the People’s Bank of China (PBOC)  added 580,000 ounces of gold to its official reserves last month; the bank now hold a total of 57.18 million ounces of gold, an increase of 0.9% from December.

The news of China’s latest gold purchases follows more data from the PBOC, showing total foreign reserves fell $99.5 billion to $3.23 trillion in January, the lowest level since May 2012. It was also the second biggest decline in reserves, just behind December’s considerable $108 billion decline.

According to some analysts and economists, China has been busy selling some of its foreign reserves and buying the yuan to prop up its weakening currency and fragile stock market.

Jeffrey Nichols, senior economic advisor at Rosland Capital and managing director at American Precious Metals Advisors, said that he is not surprised to see China buying more gold while it sells its other reserves like U.S. dollars and U.S. Treasuries.

Nichols said that the central bank’s plan to buy gold is part of its plan to make the yuan a more international and tradeable currency. Along with trying to stabilize its economy, the central bank is also diversifying its reserves away from the U.S. dollar, he said.

“One day they want to see the yuan in the same league as a reserve currency like the U.S. dollar, the euro, and the Japanese yen,” he said. “To achieve that they need to increase their gold reserves, suggesting there is strength in its currency.”

Currently, China’s gold reserves are ranked fifth in the world, behind the U.S., Germany, , Italy and France.
While China’s gold holdings are still impressive, they still only a fraction of its total reserves, making up about 1.8%. The U.S.’s gold holdings represent 72.2% of its reserves, the yellow metal makes up about 66% of Germany’s official reserves.

“If China is going to have an international currency and join the club of some of these older industrialized countries then they need to increase their reserves.”

Nichols added that he could see the Chinese central bank continue to purchase between 10 to 20 tonnes of gold each month as it works to “internationalize its currency.”

Nichols isn’t the only one who is bullish on central bank purchases, commodity analysts at Capital Economics have regularly noted that China’s official gold purchases should help to stabilize the market. In a recent report they calculated that since updating its gold holdings in July, central bank gold purchases have averaged about 17 tonnes each month. This is a significant increase of 6 tonnes since 2009.

“Over the year as a whole gold should benefit from a revival of demand for inflation hedges and from further strong buying by households and central banks in emerging economies,” they said.

Comex April gold futures last traded Monday at $1,198.80 an ounce, up more than 3.5% on the day.

By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow Neils Christensen @neils_C