Bloomberg News
Gold prices have soared to a record high of $2,400 an ounce this year, impressing global markets. China, the world’s largest producer and consumer of the precious metal, has been front and center in this remarkable growth.
Rising geopolitical tensions, including wars in the Middle East and Ukraine, and the prospect of lower US interest rates have strengthened the value of gold as an investment. But China’s unrelenting demand for gold is driving up prices, as retail investors, fund investors, futures traders and even central banks look to gold as a store of value in uncertain times.
Biggest buyer
China and India often compete for the title of world’s largest buyer. But that changed last year as consumption of jewelry, gold bars and coins surged to record levels in China. China’s gold jewelery demand rose 10%, while India’s gold jewelery demand fell 6%. At the same time, Chinese investment in gold bars and coins rose 28%.
Philip Klapwijk, managing director of Hong Kong consultancy Precious Metals Insight Ltd, said there is still room for demand to grow. Investment options in China are limited, but the lingering crisis in the real estate industry, stock market volatility and the devaluation of the yuan have all had a negative impact. Transfer funds to assets considered safe.
“In this case, the amount of money available for an asset like gold – and indeed for new buyers – is quite significant,” he said. “There are not many options in China. With exchange controls and capital controls, you can’t look to another market to put your money.”
import jump
Although China mines more gold than any other country, it still has to import large amounts of it, and the amount is increasing. Over the past two years, foreign purchases have totaled more than 2,800 tons, exceeding the total amount of the metal backed by global exchange-traded funds and equivalent to about a third of the inventories held by the Federal Reserve.
Nevertheless, shipments have accelerated recently. Chinese Lunar New Year is the peak gift-giving season, and imports have soared, up 53% in the first two months of this year compared to 2023.
central bank
The People’s Bank of China has been buying and selling for 17 months straight, the longest stretch in history, as it seeks to keep its foreign exchange reserves away from the dollar and hedge against currency depreciation.
It is the most enthusiastic buyer among the many central banks that favor gold. Official sector purchases of precious metals reached near-record highs last year, and purchases are expected to increase in 2024.
Shanghai Premium
That demand remains so strong in China despite gold prices reaching record highs and a sign of the yuan’s declining consumer purchasing power is gold’s appeal.
As a major importer, gold buyers in China often pay a premium over international prices. Earlier this month, prices jumped to $89 an ounce. Last year’s average price was $35, while the historical average was just $7.
Of course, skyrocketing prices may dampen enthusiasm for gold, but the market has proven to be unusually resilient. Chinese consumers typically pick up gold when prices fall, helping to ground the market during periods of weakness. Not so this time, as Chinese hunger is helping to push prices even higher.
Nikos Cavalis, managing director of consultancy Metals Focus Ltd, said it showed the rally was sustainable and gold buyers around the world should take comfort from rising demand in China.
Chinese authorities may be quite averse to market speculation, but they are less optimistic. State media has warned investors to be cautious behind profits, while both the Shanghai Gold Exchange and the Shanghai Futures Exchange raised margin requirements for some contracts to prevent excessive risk-taking. The move by the Shanghai Futures Exchange came after daily trading volume hit a five-year high.
ETF flows
Another, less crazy way to invest in gold is through exchange-traded funds. Funds have flowed into mainland China gold ETFs nearly every month since June, according to Bloomberg Intelligence. This compares with huge outflows from gold funds in other parts of the world.
So far this year, inflows totaled $1.3 billion, while foreign outflows totaled $4 billion. Restrictions on investment in China are again a factor in the fact that Chinese have fewer options outside of domestic real estate and stocks.
BI analyst Rebecca Sinn said in a note that demand from China could pick up as investors look to diversify into products.
——With help from Jack Wang and Eddie Spence.
