Top View Of Gold Bars​ And Yuan Banknotes. Business Finance Concept.

Why Is China on A Gold-Buying Spree? How Is it Affecting Prices of The Yellow Metal?

The comments below are an edited and abridged synopsis of an article by FP Explainers

Gold’s new highs underscore its enduring reputation as a safe-haven asset during periods of economic uncertainty. With the price remaining above 72,000 rupees per 10 grams and spot gold trading at $2,315 per ounce, the precious metal has surged, reaching a record high of Rs73,958 per 10 grams in April. This upward trajectory reflects a notable increase of around 13% in 2024, following a similar rise of over 10% in the preceding year.

Why Is China on A Gold-Buying Spree? How Is it Affecting Prices of The Yellow Metal? - BullionBuzz - BMG
Top view of gold bars and yuan banknotes. Business finance concept.

The driving forces behind this remarkable surge merit closer examination. Primarily, the surge in gold is propelled by burgeoning domestic consumption in China. The New York Times cited the China Gold Association’s data indicating a 6% increase in gold-buying during the first quarter of 2024 compared to the same period last year, following a 9% rise in 2023. Notably, China’s demand for gold jewelry surged by 10%, while investments in Chinese bars and coins nearly tripled. This trend underscores China’s dual role as both the world’s largest producer and consumer of gold.

John Reade, Chief Market Strategist at the World Gold Council, highlighted the unprecedented retail buying witnessed on the Shanghai Gold Exchange since the beginning of the year, signaling a significant shift in consumer behaviour. Notably, younger demographics, primarily in their 20s, are increasingly turning to gold as a means of maximizing their savings, eschewing traditional investments in real estate and stocks amid growing uncertainty and scandals.

Furthermore, China’s central bank has been bolstering its gold reserves, surpassing all other central banks in gold purchases in 2023. Of the 1,037 tons acquired by central banks globally, the People’s Bank of China accounted for approximately a quarter, marking the most substantial increase in its gold reserves in nearly five decades. This strategic move aligns with China’s broader agenda to diversify its reserves away from US debt, amid concerns about overreliance on the US dollar and potential Western sanctions.

However, experts caution that a correction may be imminent, particularly in the short term. Indian dealers, anticipating a potential price decline, have noted a pause in buying activity, reflecting apprehension among buyers regarding the sustainability of the recent price rally. Dealers remain cautiously optimistic, anticipating increased demand if prices stabilize or correct further.

In China, premiums have softened, with dealers charging $18 to $20 per ounce over benchmark prices, down from previous levels. Despite the Labour Day holiday temporarily dampening trading activity, consumption volume has declined, signaling a potential lull in demand.

While gold’s meteoric rise underscores its enduring allure as a safe-haven asset, the sustainability of its current trajectory remains subject to market dynamics and consumer sentiment, with potential corrections and fluctuations on the horizon.