Gold: China drags the dance of demand and price spike – Economic Post

Escalating geopolitical tensions, primarily due to the war in the Middle East and Ukraine, and the prospect of interest rate cuts in the US are fueling demand for gold as a safe-haven investment, sending its price to an all-time high above $2,400. /ounce.

At the heart of this rally is demand from China, which is the largest producer as well as consumer of the precious metal.

At the moment, according to data compiled by Bloomberg, both retail buyers and equity investors, futures traders and the central bank itself see gold as a safe haven investment in times of intense uncertainty.

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The biggest buyer

China and India routinely compete for the title of world’s largest buyer. But that changed last year as Chinese consumption of jewelry, bars and coins rose to record levels.

It is noteworthy that the demand for gold jewelry in China increased by 10%, while in India it decreased by 6%.

At the same time, Chinese investment in gold bars and coins rose by 28%.

And as Philip Klapwijk, managing director of Hong Kong-based Precious Metals Insights, told Bloomberg, there is still room for further growth in demand. Amid limited investment options in China, a protracted real estate crisis, volatile stock markets and a weakening hryvnia are driving savings and investment capital into assets considered safer.

“The money available in these circumstances for an asset like gold – and indeed for new buyers – is quite significant,” the consultancy’s CEO said. “There are not many alternatives in China. With exchange controls and capital controls, one cannot turn to other markets to put their money,” he explained.

Jump imports

Although China mines more gold than any other country, it still needs to import large quantities, which, in fact, are increasing.

Over the past two years, foreign purchases have totaled more than 2,800 tonnes, an amount equivalent to one-third of the reserves held by the US Federal Reserve.

Again, the pace of missions has picked up lately. Imports surged ahead of China’s Lunar New Year, a peak gift-giving season, and in the first two months of the year are 53% higher than the same period last year.

The Central Bank

The People’s Bank of China has been buying non-stop for 17 straight months. It is the longest streak it has ever seen in gold markets as it seeks to diversify its holdings from the dollar and offset the currency’s depreciation.

It is the most “fanatic” buyer among many central banks that favor gold. The bank recorded near-record levels of the precious metal last year and is expected to keep purchases high in 2024.

The premium in Shanghai

Indicative of gold’s allure is that Chinese demand remains strong and bullish, despite record prices for the precious metal and a weaker yuan reducing buyers’ purchasing power.

And in fact, in the period in which the premium that buyers of gold in China have to pay soared to $89 an ounce at the beginning of the month. Last year’s average is $35 versus a historical average of just $7/oz.

Analysts believe that sooner or later high prices are likely to dampen demand for gold, but point out that the market is proving unusually resilient. Chinese consumers usually took the opportunity to buy when prices fell. Not so this time, as frenzied demand from China keeps prices very high.

This suggests that the rally is sustainable and gold buyers around the world can feel safe about their investment due to growing demand from China, Nikos Kavalis, CEO of consulting firm Metals Focus, told Bloomberg.

However, China’s authorities, which can become particularly hostile to market speculation, are less sanguine. State media have warned investors to be cautious, while both the Shanghai Gold Exchange and the Shanghai Futures Exchange have raised margin requirements on some contracts to curb excessive risk-taking.

ETF flows

A less frantic way the Chinese invest in gold is through ETFs. Money has flowed into mainland China gold ETFs almost every month since June, according to Bloomberg. Chinese demand could continue to rise as investors look to diversify their holdings into commodities, BI analyst Rebecca Sin said in a note