Recent data from the United States indicate that the U.S. economy seems to have improved slightly recently. It's not that there have been any outstanding achievements, but rather, compared to the past, it appears to be moving away from recession.

However, U.S. Treasury Secretary Yellen has recently warned that the U.S. Congress must raise the debt ceiling as soon as possible, otherwise, if the United States defaults on its debt, it could trigger a catastrophic debt crisis.

Central banks around the world seem to have anticipated this, as their enthusiasm for buying gold has been continuously rising throughout 2022, with a total purchase of up to 1,136 tons of gold for the year.

01. The Impact of Quantitative Tightening

Recently, investors generally believe that the Federal Reserve will halt its interest rate hikes by the middle of the year, with the expectation that the Fed meeting in May will cease the rate hikes, leading to a generally optimistic investor sentiment.

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Entering 2023, the U.S. stock market has seen a broad rally, with the Nasdaq index having risen by 10.7% year-to-date. European stock markets are also generally on the rise, with France up by 9.4%, Germany by 8.6%, and the United Kingdom by 4.3%.

However, what has gone unnoticed is that the Federal Reserve's monetary policy has not changed at all; it remains a contractionary policy. While the magnitude of interest rate hikes is indeed gradually decreasing, the Fed is also conducting full-speed quantitative tightening.

02. The Fed is Selling Off

It's important to understand that the Federal Reserve is the central bank with the largest holdings of U.S. Treasury bonds globally. When the Fed begins to tighten its balance sheet, it means it starts selling off its holdings of U.S. Treasury bonds, which is undoubtedly like dropping a bomb in the U.S. Treasury bond market.

Who will be willing to buy U.S. Treasury bonds that even the primary holder is not keen on holding in the future? Can ordinary investors take on the massive sell-off of U.S. Treasury bonds?Although many countries and the Federal Reserve itself are continuously selling U.S. Treasuries, new U.S. debt is also being issued continuously. The Federal Reserve is a typical case of robbing Peter to pay Paul, causing losses to those holding U.S. debt.

The U.S. national debt balance has reached a staggering 31.4 trillion U.S. dollars, equivalent to 123% of last year's U.S. GDP. Once the limit is exceeded, it enters a debt default, which is why the U.S. Treasury Secretary is constantly urging Congress to raise the limit.

In the event of a U.S. debt default, it could indeed trigger a global debt crisis.

03, China has made early arrangements

China, recognizing this issue, is continuously reducing its holdings of U.S. debt. At the same time, the People's Bank of China has been purchasing gold for several consecutive months. It is evident that China has taken a series of actions to prepare for potential risks.

As U.S. debt becomes less and less favored, gold is increasingly valued by central banks around the world. Therefore, China has taken the lead in selling a large amount of U.S. debt and, instead, has bought a significant amount of gold from the global market.

Annual data provided by the World Gold Council shows that central banks around the world bought a total of 1,136 tons of gold throughout the year. In the third quarter, the net purchase was 399 tons, which has already exceeded the combined total of the first two quarters of the previous year. By the fourth quarter, the net purchase increased to 417 tons. The figures indicate that the scale of gold purchases by central banks is growing larger and larger.

In the event of a U.S. debt default, the reserve status of gold will become even more important.