Amid global tensions and economic uncertainties, China’s robust demand for gold emerges as a key driver behind its unprecedented price rally, reshaping global markets.
Amidst a global landscape marked by geopolitical tensions and economic uncertainties, the gold market has experienced an unprecedented surge, surpassing the historic $2,400 per ounce mark this year. However, behind this phenomenon lies a crucial player: China, the world’s largest producer and consumer of this precious metal.
The rise in the price of gold has captured the attention of global markets, driven by a combination of factors including escalating geopolitical tensions such as conflicts in the Middle East and Ukraine, and the prospect of lower interest rates in the United States, bolstering gold’s position as an investment refuge. But what is truly fueling this bullish trend is China’s relentless demand, where both retail buyers and institutional investors, futures traders, and even the central bank turn to gold as a store of value in times of uncertainty.
In previous years, China and India have competed for the title of the world’s largest gold buyer. However, a significant shift occurred last year as Chinese consumption of gold jewelry, bars, and coins reached record levels, surpassing its Indian counterpart. While demand for gold jewelry in China increased by 10%, in India it fell by 6%. Additionally, Chinese investments in bars and coins saw a 28% increase.
According to Philip Klapwijk, managing director of Hong Kong-based consultancy Precious Metals Insights Ltd., there is still room for demand to grow in China. The prolonged crisis in the real estate sector, volatility in stock markets, and the weakening yuan are driving the flow of money towards assets perceived as safer, such as gold.
Despite being the largest producer of gold, China still heavily relies on imports, with quantities increasing significantly in recent years. Over the last two years, overseas purchases have exceeded 2,800 tons, more than all the metal backed by exchange-traded funds worldwide or approximately a third of the reserves held by the US Federal Reserve.
The People’s Bank of China has been on a buying spree for 17 consecutive months, its longest streak ever, in an effort to diversify its reserves away from the dollar and hedge against currency depreciation. Additionally, China is the most active buyer among several central banks favoring gold, with record-level purchases last year expected to remain elevated in 2024.
The allure of gold for Chinese buyers remains strong, despite record prices and the weakness of the yuan, which reduces purchasing power. As a major importer, Chinese buyers often have to pay a premium over international prices, which has led to a significant increase in the premium price to unprecedented levels, suggesting continued demand even under high price conditions.
In contrast to Western markets, where flows into gold funds have been predominantly negative, in China investment in exchange-traded funds has steadily increased since June. This is partly due to restrictions on foreign investment, limiting investment options for Chinese investors beyond domestic property and stocks.
In summary, gold demand in China shows no signs of waning, and its role as a driver of the global gold market seems solid as investors seek to diversify their portfolios and hedge against global economic and geopolitical uncertainty.