Chinese demand may continue to grow as investors look to diversify their holdings
Gold has soared to an all-time high above $2,400 an ounce this year, enthralling global markets. China, the world’s largest producer and consumer of the precious metal, has been front and center on the extraordinary climb.
Geopolitical tensions, including war in the Middle East and Ukraine, and the prospect of lower US interest rates burn gold’s billing as an investment. But juicing the rally is unabated Chinese demand, as retail buyers, fund investors, futures traders and even central banks look to bullion as a store of value in the uncertain future.
The biggest buyer
China and India have generally competed for the title of world’s largest buyer. But that changed last year as Chinese consumption of jewelry, bars and coins hit record levels. China’s demand for gold jewelery grew by 10% while India’s fell by 6%. Chinese bar and coin investment, meanwhile, rose 28%.
And demand still has room to grow, said Filip Klapwijk, managing director of Hong Kong-based consultancy Precious Metals Insights Ltd. amid limited investment options in China, a prolonged crisis in its property sector, a volatile stock market and a weak yuan. are Sending money to assets that are considered safe.
“For an asset like gold – and indeed for new buyers to come in – the weight of available money is quite significant in these circumstances,” he said. “There’s not a lot of choice in China. With exchange controls and capital controls, you can’t look at other markets to put your money into.”
import jump
Although China mines more gold than any other country, it still needs to import a lot and the quantities are increasing. Over the past two years, foreign purchases have totaled more than 2,800 tonnes – more than all the metal backing exchange-traded funds worldwide, or a third of the reserves held by the US Federal Reserve.
However, the pace of shipments has accelerated recently. Imports surged during China’s Lunar New Year, the peak gift-giving season, and the first three months of the year, up 34% from 2023.
central bank
The People’s Bank of China has been on a 17-month straight buying spree, its longest such buying streak, as it seeks to shift its reserves away from the dollar and hedge against currency depreciation.
It is the most eager buyer of the many central banks that favor gold. The official sector broke near-record levels of the precious metal last year and is expected to keep purchases high in 2024.
Shanghai Premium
It is a sign of the allure of gold that Chinese demand is so strong despite record prices and a weak yuan that robs buyers of purchasing power.
As a major importer, gold buyers in China often pay a premium over international prices. At the beginning of the month, it reached 89 dollars per ounce. Last year’s average was $35 compared to a historical average of just $7.
Sure, skyrocketing prices are likely to dampen some enthusiasm for bullion, but the market is proving unusually resilient. Chinese consumers have typically snapped up gold when prices fall, which has helped establish a floor for the market during periods of weakness. Not so this time, as China’s appetite is helping drive prices to much higher levels.
That suggests the rally is sustainable and gold buyers everywhere should be comforted by rising demand from China, said Nikos Kvallis, managing director at consultancy Metals Focus Ltd.
Chinese officials, who can be quite hostile to market speculation, are less sanguine. State media warned investors to be cautious in chasing the rally, while both the Shanghai Gold Exchange and the Shanghai Futures Exchange raised margin requirements on some contracts to avoid taking too much risk. SHFE’s move boosted daily trading volume to a five-year high.
ETF flows
A less crowded way to invest in gold is through exchange-traded funds. Money has flowed into gold ETFs in mainland China nearly every month since June, according to Bloomberg Intelligence. This compares with huge flows into gold funds in the rest of the world.
The total so far this year has been $1.3 billion, compared with $4 billion in funds from abroad. Restrictions on investment in China are once again a factor here, giving the Chinese fewer options beyond domestic property and stocks.
BI analyst Rebecca Sin said in a note that Chinese demand could continue to grow as investors look to diversify their holdings with commodities.
on the wire
Chile has imposed temporary anti-dumping tariffs on Chinese steel products used in the country’s mining industry to support local producers. The move pushed Cap SA to reverse its decision to close its steel mills.
China’s most promising industries face the growing threat of trade sanctions from Western governments, clouding the outlook for stocks that have the potential to fuel the country’s market growth.
With Beijing already a top target in the US election campaign, President Xi Jinping’s government is resisting any move that could overturn the world’s second-largest economy.
When you introduce a raft of tariffs and restrictions to protect domestic industries, you’d better make sure there’s something around to protect them. This is a major problem with the US decision to treat China’s clean technology leadership as a basis for a trade war.
