Gold: “Steam engine” of historic highs China – Economic Postman

Gold’s rise to all-time 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 the extraordinary rise.

Worsening geopolitical tensions, including the war in the Middle East and Ukraine, and the prospect of lower interest rates in the US have helped to restore gold as an investment. But fueling the rally is largely attributed to strong Chinese demand, as retail buyers, equity investors, futures traders and even the central bank look to gold as a store of value in uncertain times.

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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. Demand for gold jewelery in China increased by 10%, while Indian demand fell by 6%. Chinese bullion and coin investment, meanwhile, rose 28%.

And there is still room for demand to grow, said Philip Klapwijk, managing director of Hong Kong-based Precious Metals Insights. “The weight of money available in these circumstances for an asset like gold – and indeed for new buyers – is quite significant,” he said. “There are not many alternatives in China. With exchange controls and capital controls, you can’t just look at other markets to put your money into,” he added.

Jump imports

Although China mines more gold than any other country, it still needs to import a lot, and the quantities are getting bigger. Over the past two years, overseas purchases have totaled more than 2,800 tonnes – more than all the metal backing exchange-traded funds around the world, or about a third of the reserves held by the US Federal Reserve.

Even so, the pace of missions has picked up lately. Imports surged during the Chinese New Year celebrations, a peak period for gifts, and in the first three months of the year are 34% higher than they were in 2023.

Central Bank

The People’s Bank of China has been on a buying spree for 17 straight months, its longest buying streak, as it tries to diversify its holdings away from the dollar and offset the currency’s depreciation.

It is the most ardent buyer among several central banks that favor gold. The official sector recorded near-record levels of the precious metal last year and is expected to keep purchases high in 2024.

It is indicative of gold’s allure that Chinese demand remains so buoyant, despite record prices and a weaker yuan that is robbing consumers of purchasing power.

As a major importer, gold buyers in China often have to pay a premium over international prices. That jumped to $89 an ounce earlier this month. Last year’s average is $35 versus a historical average of just $7.

Sure, high prices are likely to dampen enthusiasm for gold, but the market is proving unusually resilient. Chinese consumers have typically rushed to gold when prices fall, which has helped create a floor for buying during periods of weakness.

That suggests the rally is sustainable and gold buyers everywhere will have to come to terms with rising Chinese demand, said Nikos Kavalis, chief executive of consultancy Metals Focus.

ETF flows

A less frenetic way to invest in gold is through the exchange traded funds. Money has flowed into mainland China gold ETFs almost every month since June, according to Bloomberg Intelligence. This compares with massive gold capital outflows to the rest of the world.

Money inflows have totaled $1.3 billion so far this year, compared with $4 billion in outflows from capital abroad. Restrictions on investment in China are again a factor here, given fewer options for the Chinese beyond domestic real estate and stocks.

Chinese demand could continue to rise as investors look to diversify their commodity holdings, BI analyst Rebecca Sin said in a note.