Gold Prices Surge as China’s Demand Continues to Rise

Gold Prices Surge as China's Demand Continues to Rise
Published on: Apr 22, 2024

Since 2024, the price of gold has surged fiercely, reaching a historical high of over $2,400 per ounce. Some attribute the sharp rise in gold prices to safe-haven demand sparked by  geopolitical tensions, particularly the conflicts in the Middle East and Ukraine, while others point to the increased attractiveness of gold as an investment due to expectations of interest rate cuts by the Federal Reserve. However, any analysis would appear inadequate without considering China’s gold demand.

China’s demand for gold is robust and widespread, with retail shoppers, fund investors, futures traders, and even the central bank now viewing gold as a store of value during uncertain times.

China is the Largest Buyer of Gold

China stands as the largest buyer of gold, with significant increases in the consumption of gold jewelry, bars, and coins reaching record levels last year. Amid real estate crises, volatile stock markets, and currency depreciation, funds have flowed into gold, indicating further potential for growth in China’s gold demand. Data from the World Gold Council shows that since 2013, China has consistently been the world’s largest consumer of gold, with annual gold consumption increasing fivefold over the past 30 years.

Rapid Increase in China’s Gold Imports

Despite being the world’s largest gold producer, China still needs to import significant amounts of gold annually. Over the past two years, overseas purchases have totaled over 2,800 tons, exceeding the gold holdings of global exchange-traded funds (ETFs) and amounting to almost one-third of the gold reserves held by the Federal Reserve. Recent data from Chinese customs shows that in January, China’s net gold imports reached 160 tons, a significant increase of 104 tons compared to the previous month, marking a new high for January. In the first three months of this year, gold imports have surged by 34% compared to the same period in 2023.

Continuous Large-scale Gold Purchases by the People’s Bank of China

To further diversify reserve assets and hedge against currency depreciation risks, the strong trend of gold purchases by the People’s Bank of China continues. China’s official gold reserves have increased for the 17th consecutive month, with a 5-ton increase in March to reach 2,262 tons. Currently, gold accounts for 4.6% of China’s total foreign exchange reserves. From January to March 2024, the People’s Bank of China has announced the purchase of 27 tons of gold. Since the resumption of growth in China’s gold reserves in November 2022, the official gold reserves in China have increased by a cumulative total of 314 tons.

Surge in Shanghai Premium

Since the opening of the Chinese gold market in 2002, the surge in gold investment demand, Chinese control measures, and the impact of import costs have led to the emergence of a corresponding gold premium, known as the Shanghai premium, a unique phenomenon in the Chinese gold market. Earlier this month, the Shanghai premium soared to $89 per ounce, significantly higher than the average premium of $35 over the past year and far above the historical average of $7. The sharp increase in the Shanghai premium has drawn the attention of Chinese authorities, with official media warning investors not to chase the rise. Meanwhile, the Shanghai Gold Exchange (SGE) and Shanghai Futures Exchange (ShFE) have increased the margins on some contracts.

Continued Inflow of Gold ETFs in the Chinese Market

As of now, total inflows into gold ETFs in the Chinese market amount to $1.3 billion, marking the fourth consecutive month of inflows, compared to an outflow of $4 billion from overseas funds during the same period. The continuous inflow of gold ETFs in the Chinese market, coupled with the soaring domestic gold prices, has collectively driven the total asset management size to a new high, reaching $5 billion by the end of March, with a total holding increase of 2.2 tons to 67 tons.

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