Energy & Resources

Raising the bar

Chinese investors help rebound in gold prices


Glittering again in China?

Global investors have been selling their gold but consumers in China are buying more of it again. That was the story of the precious metal in the first quarter of this year, with demand from China offsetting some of the downward pressure on the gold price.

First quarter sales of gold jewellery in China were at their highest levels since 2015, the Shanghai Daily reported last week, helped by a booming trade in gufajin, or jewellery with elements of ancient Chinese fashion.

Gufajin has two obvious features: it’s heavy and expensive,” explained Roland Wang, the World Gold Council’s managing director in China. “In the past, consumption mainly came from middle class women with high incomes. But this year more young women began buying it.”

Sales figures from the China Gold Association back that up, with physical demand for gold nearly doubling in the first quarter, fuelled by stronger interest in jewellery, bars and coins. Consumption was 288 tonnes over the period, compared with 149 tonnes a year ago, the association said, helped by strong sales over the Chinese New Year and Valentine’s Day.

That was a complete reversal of last year, when the pandemic punched a huge hole in retail sales, which typically account for about half of physical demand for gold. Stores were closed for weeks and shoppers cut back on their spending for even longer because of uncertainty about how the virus might linger. James Steel, HSBC’s chief precious metals analyst, has highlighted how the sense of apprehension fed directly into a plunge in Chinese imports of the precious metal, which collapsed to just under 72 tonnes last year from 456 tonnes a year earlier.

All of this was happening in a year in which the gold price surged by a quarter to a peak of just over $2,072 an ounce last August.

Again Covid-19 was the reason, with fearful investors buying heavily into gold exchange-traded funds as a safe-haven strategy. Gold held by these ETFs climbed rapidly to record highs but vaccine rollouts and signs of economic recovery in major markets like China and the US then dialled down the fear factor, reversing the direction on price.

Recovering bond yields dampened investor enthusiasm further by increasing the opportunity cost of owning gold and the price of the precious metal fell back sharply from its high, dropping further into March this year when it dipped briefly below $1,700.

Gold was trading at $1,792 an ounce as of Thursday this week, with some of the recovery fired by the increase in physical demand from markets like China.

The pick-up in activity saw withdrawals from the Shanghai Gold Exchange double in March from a year earlier, for instance, and gold has been trading in the local market at premiums to global prices. This prompted regulators to bump up import quotas for the country’s banks, Reuters reported in late April, with 150 tonnes of additional gold shipments due to arrive this month.

Gold bugs are also hopeful of a wave of new buying as well from the People’s Bank of China, the central bank, which made no purchases of gold at all last year, choosing to stay more liquid in its currency reserves.

That stance could change as the economic risks from Covid-19 subside.

China has officially declared its reserves of gold to be 1,948 tonnes, although its real holdings are much higher, Dominic Frisby claimed in Money Week last month. The Chinese have been the world’s largest gold producer for more than a decade, mining about 380 tonnes last year (a fifth more than the second-largest producer, Australia). All of that gold has been hoarded at home, Frisby reckons, and the Chinese are also the biggest importer of the metal.

In fact the consensus from the analysts that he spoke to was that there are probably about 29,000 tonnes of gold held in China, with about half under direct state control. That is far in excess of the 8,134 tonnes of reserves held by the US government, Frisby says.

Those figures would suggest that the new ‘Fort Knox’, so to speak, is in China…

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