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China's unyielding gold demand fuels global price surge

china and gold,financial news

The phenomenal increase in gold prices, soaring above $2,400 an ounce this year, has captured the attention of global financial markets. This significant price rise places China at the forefront, as it is both the largest producer and consumer of this precious metal. The strong demand from China is not only a reflection of its dominant position in the market but also highlights the critical role it plays in the global dynamics of gold trading.

The elevation in gold's value can be attributed to a combination of worsening geopolitical conflicts, such as the ongoing wars in the Middle East and Ukraine, and the expectation of reduced interest rates in the United States, which bolsters gold's appeal as a stable investment option. Moreover, the rally is being fueled by relentless demand from various Chinese market participants. This includes everyday retail shoppers, professional fund investors, active futures traders, and even the national central bank, all of whom regard gold as a trustworthy refuge during times of uncertainty.

Traditionally, China and India have alternated as the world’s largest consumers of gold. However, a shift occurred last year when Chinese demand for gold jewelry, bars, and coins surged to new heights. In particular, there was a significant uptick in Chinese consumption; gold jewelry demand increased by 10%, and investments in bars and coins jumped by 28%, contrasting with a decline in Indian demand.

Philip Klapwijk, a managing director at Precious Metals Insights Ltd. in Hong Kong, believes there is still significant potential for growth in Chinese gold demand. He points out that the combination of restricted investment alternatives, a protracted crisis in the real estate sector, volatile stock markets, and a depreciating yuan is compelling Chinese investors to turn to perceived safer assets, such as gold.

China's position as the leading gold miner does not negate its need to import substantial quantities of the metal. Over the last two years, its gold imports have totaled more than 2,800 tons—exceeding the reserves held in gold exchange-traded funds globally and roughly one-third of the U.S. Federal Reserve's gold reserves. This import activity has increased recently, particularly around the Lunar New Year, which is traditionally a peak season for gifting gold.

For 17 consecutive months, the People’s Bank of China has been purchasing gold, marking its longest streak of continuous acquisitions. These purchases are part of a broader strategy to diversify China’s financial reserves away from the U.S. dollar and to safeguard against potential currency devaluation, reflecting the central bank's proactive approach to managing its reserve assets.

China's unwavering interest in gold continues to thrive, even against the backdrop of record-high prices and a depreciating yuan, which typically would reduce purchasing power. This robust demand often forces Chinese buyers to pay a premium over the international gold price, a margin that has notably widened recently.

While high gold prices might typically curb enthusiasm for such investments, the Chinese market has shown remarkable resilience. Generally, Chinese consumers are keen to buy more gold when prices fall, providing a support level for the market during downturns. However, the current sustained demand from China is helping to maintain higher price levels, indicating a strong market.

The enduring high demand for gold in China suggests that the price rally could be long-lasting, providing a sense of security to gold investors worldwide, according to Nikos Kavalis of Metals Focus Ltd. This demand is a clear indicator of gold's enduring appeal as a safe investment amid economic uncertainties.

Chinese authorities, wary of excessive market speculation, have taken steps to temper the enthusiasm for gold. The state media has issued cautions against overly speculative investments, and regulatory bodies like the Shanghai Gold Exchange and Shanghai Futures Exchange have raised margin requirements on some trading contracts. These measures aim to control speculative trading, which has reached its highest levels in five years.

Contrasting with the global trend of significant withdrawals from gold funds, gold ETFs in mainland China have experienced almost consistent net inflows since the previous June. This trend highlights the limited investment opportunities available in China, which are primarily confined to domestic markets such as property and stocks. This ongoing influx of capital into gold ETFs underlines the unique investment landscape in China.

The expectation that Chinese investors will continue to diversify their portfolios by including more commodities like gold is supported by analysis from Bloomberg Intelligence. This trend toward diversification reflects a strategic shift in investment patterns within China, aiming to stabilize returns and reduce exposure to volatile market sectors.



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