The rise in gold prices to an all-time high of over $2,400 an oz this yr has captivated global markets. China, the world’s largest producer and consumer of the dear metal, is at the middle of the extraordinary rise.
Increasing geopolitical tensions, including war Middle East and Ukraine, in addition to the prospect of lower US rates of interest, cloud the importance of gold as an investment. But the rally is being fueled by relentless Chinese demand as retail customers, fund investors, futures traders and even the central bank turn to gold bullion as a store of value in uncertain times.
China and India typically compete for the title of the world’s largest buyer. But that modified last yr as Chinese consumption of knickknack, bars and coins surged to record levels. Gold jewelry demand in China increased by 10%, while demand in India fell by 6%. Chinese bullion and coin investment, meanwhile, rose 28%.
And there remains to be room for increasing demand, said Philip Klapwijk, managing director of Hong Kong-based consultancy Precious Metals Insights Ltd. Against the backdrop of limited investment opportunities in China, the continued real estate crisis, volatile stock markets and a weakening yuan, these are all channeling money into assets which are considered safer.
“The amount of money available for an asset like gold – and indeed for new buyers – in these circumstances is quite significant,” he said. “There is no big alternative in China. With exchange controls and capital controls, you can’t just look for other markets to invest your money in.”
Even though China produces more gold than another country, it still must import a variety of gold, and the quantities are only increasing. Over the past two years, overseas purchases totaled greater than 2,800 tons – greater than all of the metal backing exchange-traded funds around the globe, or a few third of the Federal Reserve’s reserves.
Still, the pace of shipping has accelerated recently. Ahead of Chinese New Year, a peak gift-giving season, imports surged and are 53% higher in the primary two months of the yr than in 2023.
The People’s Bank of China is on a buying spree 17 consecutive monthsthe longest buying streak ever because the country looks to diversify its reserves away from the dollar and hedge against currency devaluation.
It is probably the most avid buyer amongst central banks that favor gold. The official sector collapsed almost record-breaking values of the dear metal last yr and is anticipated to maintain purchases at a high level in 2024.
That Chinese demand stays so buoyant despite record prices and a weaker yuan that’s robbing buyers of buying power shows the appeal of gold.
As a big importer, gold buyers in China often must pay a premium over international prices. At the start of the month, the value rose to $89 per ounce. Last yr’s average is $35, versus a historical average of just $7.
To be certain, sky-high prices may dampen enthusiasm for bullion somewhat, however the market is proving unusually resilient. Chinese consumers have typically snapped up gold when prices fell, which has helped create a market floor during weak times. This time this is just not the case as China’s appetite helps to maintain prices at much higher levels.
That suggests the rally is sustainable and gold buyers around the globe should take comfort from China’s booming demand, said Nikos Kavalis, managing director of consultancy Metals Focus Ltd.
China’s authorities, which will be quite hostile to market speculation, are less sanguine. State media has warned investors to be cautious in tracking the rally, while each the Shanghai Gold Exchange and Shanghai Futures Exchange increased margin requirements on some contracts to discourage excessive risk-taking. SHFE’s move followed a surge in every day trading volumes to a five-year high.
A less hectic solution to spend money on gold is thru exchange-traded funds. Money has flowed into gold ETFs in mainland China almost every month since June, in accordance with Bloomberg Intelligence. Compared to the large outflows from gold funds in the remainder of the world.
Cash inflows totaled $1.3 billion to this point this yr, compared with outflows from overseas funds of $4 billion. Again, restrictions on investing in China are an element, as there are fewer options for Chinese people beyond domestic real estate and stocks.
Chinese demand could rise further as investors look to diversify their holdings with commodities, BI analyst Rebecca Sin said in a note.
