China Reshapes Global Gold Market Dynamics, Asserts Price Setting Role Amid Faltering US Influence

China Reshapes Global Gold Market Dynamics
Published on: May 15, 2024

This year, there has been a significant rise in gold prices. However, in the past three weeks, due to the U.S. Federal Reserve’s reluctance to initiate interest rate cuts amid high inflation, the momentum for the rise in gold prices has been weak, with prices consolidating around $2,350 per ounce. However, the role of the Asian, particularly the Chinese gold market, is transitioning from being price takers to price setters, with U.S. monetary policy becoming a secondary factor.

China holds considerable influence in the gold market, but its impact has become more pronounced in this recent bull market. Since the end of 2022, global gold prices have risen nearly 50%. Since 2008, China’s gold market has undergone significant changes; it is no longer just a buyer on dips, playing a role in supporting the market, but now can exert influence over price discovery in the entire market.

Why such an assessment? Clues can be found from the development trajectory of the Chinese gold market over the past two decades.

In 2001, China liberalized its gold market, initiating a comprehensive marketization of gold. However, it was not until the financial crisis in 2008 that gold, as an asset, truly entered the radar of central banks and Chinese consumers.

Speaking of Chinese demand for gold, 2013 was a pivotal year, when China cemented its stature as a ‘market of last resort’ for gold. In the first half of 2013, Western investors sold off gold, causing the price to plummet by 29%. Chinese consumers took the opportunity to purchase a record 1,400 tons of gold, establishing a floor price of $1,200 per ounce for gold. This incident, where ‘China’s middle-aged women’ outmaneuvered Wall Street tycoons, became a highlight of that year.

Since then, China’s influence has grown day by day. In 2014, the Shanghai Gold Exchange International (SGEI) opened up to global investors, providing a direct channel for foreign institutions and individuals to participate in the Chinese gold market, and simultaneously established China’s benchmark for international gold prices. In 2016, SGEI initiated gold pricing in renminbi, competing with New York and London for pricing and has now grown into the world’s largest physical spot gold exchange.

China is the world’s largest gold-producing country, accounting for more than 10% of global production. Despite this, China still imported 1,480 tons of gold last year. Moreover, data from the China Gold Association shows that in the first quarter of this year, China’s gold consumption increased by 6% year-on-year.

The robust domestic demand in China is also reflected in the premiums on gold within the country. At the beginning of April, gold premiums on the SHGEI reached a high of $85 compared to London gold, with an average premium of $43 since the beginning of the year, which is higher than the historical norm. This premium is mainly driven by the demand from Chinese consumers.

Besides, the People’s Bank of China is also expected to continue purchasing gold in the foreseeable future. Over the past 15 years, China’s central bank’s gold reserves have increased from 600 tons to 2,235 tons, with an average annual increase of 109 tons, and the proportion of gold reserves relative to total reserves has increased from less than 1% to 4.3%. Compared to other countries, this proportion is not high, and it needs to increase to at least 10% to have a significant impact on reserves.

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