Robust Chinese Gold demand expected to continue supporting the market

Strong Chinese gold demand will continue to support the gold market according to a recent research report by Metals Focus.

Gold recently hit record highs over $2,400, but there has been some profit-taking and consolidation this week. Cooling geopolitical tensions in the Middle East have dampened safe haven buying. Meanwhile, recent hawkish open-mouth operations by the Federal Reserve officials have also created headwinds for gold. The gold price tumbled 2.7 percent on Monday (April 23), the worst single-day decline in almost two years.

Last week, Federal Reserve Chairman Jerome Powell admitted the inflation fight isn’t going well and hinted that interest rates may stay higher for longer.

“We have stated that we need greater confidence in inflation before considering lowering interest rates. However, the recent data has not given us greater confidence that inflation is heading toward the 2 percent target.”

Powell went on to say, “It is appropriate to let restrictive policy take further time to work.”

Chicago Fed president Austan Goolsbee was even more blunt, saying, “Progress on inflation has stalled.”

The hawkish turn drove the yield on the 2-year Treasury to 5 percent.

While gold charted a significant correction, the price didn't fall nearly as far as one might expect given the recent market dynamics. For months, investors in the West have sold gold at any hint that the Federal Reserve will keep interest rates higher for longer. Given the messaging coming out of the central bank, an even bigger correction wouldn't have been a shock.

But there are other factors supporting the gold market, particularly in the East.

Chinese Gold demand strong despite rising prices 

The Fed turn, along with the recent correction, might discourage some gold bulls, but analysts and Metals Focus say Asian demand, especially Chinese buying, will continue to support gold prices throughout 2024.

Gold demand in Asia, particularly China, has been robust for months. Wholesale demand in China set a record in January. Assets under management by Chinese gold-backed ETFs also hit an all-time high.

Gold demand in China was up 28 percent in 2023 and analysts and Metals Focus project continued solid demand through the rest of the year.

Robust gold buying has driven the gold price premium for gold traded on the Shanghai Gold Exchange to extremely high levels. Chinese buyers have paid an average of $40 above the London Bullion Market Association benchmark through the first four months of this year.

Metals Focus analysts note that Chinese investors have historically sold gold into rising prices. This hasn’t been the case over the last several months. Despite a rising gold price and that big premium, Chinese investors have continued to pile into gold – specifically physical bullion in the form of bars and coins.

“Although sharp price gains have weighed on jewelry consumption, bullish price expectations (and a lack of alternative investment options in some countries) have, in fact, helped boost demand for bars and coins and have limited the scale of profit taking in Asia and the Middle East.” 

The report said even if we see a further decline in retail gold investment, the global sale of gold bars and coins will likely increase in 2024. 

The Metals Focus report noted that Chinese investors are struggling with a lack of investment options during a time of economic uncertainty. As a result, they are turning to a tried-and-true wealth preservation asset – gold.

“It is worth noting that in 2023, total area and sales of commercial housing sold was down 8.5% and 6.5%, respectively y/y. Turning to equity markets, the Shanghai Composite Index and Shenzhen Component Index were under pressure for much of last year while their recent rebound seems to have stalled. All this is benefiting gold's appeal as a safe haven and portfolio diversifier, among investors.”

Chinese investors seem to be following the lead of their central bank. The People’s Bank of China has been gobbling up gold for over a year. The central bank has expanded its gold reserves for 16 straight months, adding over 300 tons of the yellow metal to its stash since it resumed reporting gold purchases in October 2022. 

The People's Bank of China added 1,448 tons of gold to its stash between 2002 and 2019, and then suddenly went dark until it resumed reporting in the fall of 2022. There is speculation that the Chinese were still adding gold to their holdings off the books during those silent years.

It appears the Chinese central bank is intentionally trying to minimize its exposure to the U.S. dollar. 

Metals Focus analysts said Chinese central bank buying is sending a strong signal to Chinese investors.

“The PBoC’s ongoing diversification into gold most probably reinforced local investors’ belief in the metal and solidified its role as a hedge against market turmoil and financial instability.”