Gold prices have reached an unprecedented peak this year, exceeding $2,400 per ounce, primarily driven by sustained demand from China.
As the world’s largest producer and consumer of gold, China’s impact on the market is significant. This increase in demand has been influenced by recent geopolitical tensions and broader economic uncertainties, which have bolstered the perception of gold as a secure investment.
China’s Increasing Influence on Global Gold Consumption
China has recently surpassed India as the world’s leading gold consumer, experiencing significant growth in the demand for jewellery, bars, and coins. Gold jewellery demand in China increased by 10%, and investments in bars and coins rose by 28%. These increases are largely due to the ongoing economic challenges in China, such as stock market instability and a depreciating yuan, which have driven investors towards more stable assets.
“The weight of money available under these circumstances for an asset like gold – and actually for new buyers to come in – is pretty considerable,” he said. “There isn’t much alternative in China. With exchange controls and capital controls, you can’t just look at other markets to put your money into.”
Rising Imports and Central Bank Acquisitions
China continues to import significant quantities of gold to satisfy domestic demand, despite being the leading gold producer. In the last two years, its imports have totalled over 2,800 tons, exceeding the reserves held by many global central banks and major ETFs. The first two months of 2024 alone saw a 53% increase in imports compared to the previous year, particularly due to high demand around the Lunar New Year.
The People’s Bank of China has also maintained its gold purchases for 17 consecutive months, the longest streak on record, as part of its strategy to diversify reserves and hedge against potential currency depreciation. This aligns with a broader trend of increased gold acquisitions by central banks worldwide.
Market Dynamics and the Impact of the Shanghai Premium
Despite high prices potentially deterring buyers, demand in China remains strong. The premium on gold in Shanghai recently reached $89 per ounce, significantly higher than the historical average, indicating robust demand and the higher costs associated with importing gold into China.
Amid concerns over intense market activity, Chinese regulatory bodies have tightened trading regulations, including raising margin requirements on the Shanghai Gold Exchange and Shanghai Futures Exchange, to curb speculative trading.
Trends in ETFs and Market Projections
In contrast to the global trend of outflows from gold funds, China has witnessed consistent inflows into gold ETFs since last year. The limited investment options available in China, primarily confined to domestic assets, have channelled approximately $1.3 billion into these ETFs this year.
Forecasters suggest that gold demand in China is likely to remain strong or even increase as investors continue to seek diversified portfolios amidst economic instability. This ongoing demand is expected to support high global gold prices, reinforcing gold’s reputation as a stable investment during uncertain times.
Industry Implications
For jewellers and industry professionals, China’s robust demand for gold presents both challenges and opportunities. While high prices might impact consumer purchasing patterns, they also indicate a stable market for gold investments. Jewellers should consider adapting to market changes by potentially offering investment-grade products alongside traditional jewellery to capitalize on new consumer investment trends and mitigate the risks associated with price fluctuations.
