The rise in gold prices to record highs above $2,400 an ounce this year has captivated global markets. China, the world’s largest producer and consumer of the precious metal, is at the center of an extraordinary recovery.
Increasing geopolitical tensions, including war in Near East and Ukraine, as well as the prospect of lower interest rates in the United States, all improve the attractiveness of gold as an investment. But driving the rally is unrelenting Chinese demand as retail buyers, fund investors, futures traders and even the central bank view bullion as a store of value in uncertain times.
China and India usually compete to be the world’s biggest buyer. But that changed last year when consumption of jewelry, bars and coins in China rose to record levels. Demand for gold jewelry in China increased by 10%, while in India it fell by 6%. Meanwhile, Chinese investment in bars and coins grew by 28%.
And demand still has room to grow, says Philip Klapwijk, managing director of Hong Kong-based consultancy Precious Metals Insights Ltd. redirecting money into assets that are considered safer.
“The weight of money available in these circumstances for an asset like gold – and indeed for new buyers to come in – is quite significant,” he said. “There are not many alternatives in China. With foreign exchange controls and capital controls, you can’t just look at other markets to invest your money.”
Although China produces more gold than any other country, it still needs to import a lot, and the volumes are getting larger. Overseas purchases have totaled more than 2,800 tons over the past two years, more than all the metal that supports exchange-traded funds around the world, or about a third of the stock held by the U.S. Federal Reserve.
Despite this, the pace of deliveries has accelerated recently. Imports surged ahead of China’s Lunar New Year, the peak gift-giving season, and were 53% higher in the first two months of the year than in 2023.
The People’s Bank of China was actively buying 17 months in a rowIt is the longest buying streak in history as it seeks to diversify its reserves away from the dollar and hedge against currency depreciation.
It is the most active buyer among a number of central banks that favor gold. The official sector has gained momentum almost record levels precious metal last year and purchase volumes are expected to remain high into 2024.
Gold’s appeal is evidenced by the fact that demand in China remains so strong despite record prices and a weaker yuan robbing buyers of purchasing power.
As a major importer, gold buyers in China are often forced to pay a premium to international prices. At the beginning of the month, this figure jumped to $89 per ounce. The average over the past year was $35, compared to the historical average of just $7.
Of course, sky-high prices will likely dampen some enthusiasm for bullion, but the market is proving to be unusually resilient. Chinese consumers tend to buy gold when prices fall, which helps put a floor under the market during periods of weakness. Not so this time, as China’s appetite helps keep prices at much higher levels.
This suggests the rally is sustainable and gold buyers around the world should be comforted by rising demand in China, said Nikos Kavalis, managing director of consultancy Metals Focus Ltd.
Chinese authorities, who can be quite hostile to market speculation, are less optimistic. State media warned investors to be wary of the rally, while the Shanghai Gold Exchange and Shanghai Futures Exchange raised margin requirements on some contracts to curb excessive risks. SHFE’s move follows a surge in daily trading volumes to a five-year high.
A less hectic 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 can be compared to the massive outflow of gold funds in the rest of the world.
Cash inflows this year have been $1.3 billion, compared with $4 billion in outflows from funds overseas. Restrictions on investment in China are again a factor, given that the Chinese have fewer options beyond domestic ownership and shares.
Demand in China could continue to rise as investors look to diversify their holdings into commodities, BI analyst Rebecca Xing said in a note.