China’s steady increase in gold purchases will keep gold prices elevated for the next decade, according to Capital Economics. Analysts point to the consistent gold demand from the People’s Bank of China (PBOC) and resurgent interest from Chinese retail investors. China’s gold buying spree is driven by several factors, including costly economic sanctions, ambitions to strengthen the Yuan, domestic financial weaknesses, and its leadership in the BRICS coalition – a consortium of emerging markets focused on de-dollarization. These factors are expected to fuel Chinese gold demand for more than a decade, supporting elevated gold prices.
Tracking China’s Gold Binge
PBOC holds over 2,264 tons of gold, representing the 6th largest store of the yellow metal.
China topped off its gold reserves for 18 months straight, only pausing recently.
The country bought 225 tons in 2023.
China’s gold coin and bar purchases jumped over 46% year-over-year in mid-2024.
China’s Shining Opportunity
Every country maintains gold reserves, but China is relying heavily on the yellow metal for a few critical reasons:
Real Estate Bubble: Experts are raising alarm bells over fears of an imminent collapse in China’s real estate market. Decades of uninterrupted growth and topsy-turvy demographics threaten to pop the housing bubble and, potentially, the entire economy. Gold is seen as a hedge against that potential.
De-Dollarization: At the head of the BRICS table, China is leading the worldwide push away from the dollar’s influence. In this case, gold is used as an exchange mechanism to bypass US sanctions and a sturdy grounding while the Chinese economy reduces its dependence on USD. The regional power is looking to exert more control and influence in that area of the world.
Strengthen the Yuan: China isn’t only interested in shunning the dollar. The emerging world power wants to strengthen its local currency on the world stage. A foundation in physical gold is intended to instill more confidence and stability from investors, compared to a free-floating dollar. Already, 90% of China-Russia trade is completed in local currencies.
Shifting Reserves Gold
China’s recent gold-buying binge is a relatively recent shift. Capital Economics analysts point out that, “China [is] armed with $3 trillion of reserve assets but currently holds 5% of these in gold.” After a brief respite, the government recently implemented gold quotas which suggest the yellow metal is part of a long-term economic plan. This is the primary reason Capital Economics’ analysts see for increased gold prices far down the line.
Retail Demand Returns
The country’s central bank isn’t the only source of gold demand from China. Chinese investors have long held the top spot as for largest consumers of gold, only ever beat out by India. This demand primarily comes in the form of jewelry but positively affects gold prices nonetheless. The pandemic saw a decline in jewelry purchases, but demand has recently returned to standard levels. Every month, retail investors spend between 20-30 billion Yuan on gold jewelry for personal adornment and investment.
Short Term vs Long Term Focus
The report by Capital Economics highlights China’s current pullback in gold demand but suggests the break won’t last long. A combination of record-high gold prices, low domestic stock market evaluations, and a potential fiscal stimulus package could reduce gold’s glimmer temporarily.
“Bringing all this together, the attractiveness of gold relative to other assets will probably fall, and ‘safe-haven’ demand for gold in China is likely to ease,” analysts indicated. However, their projection of elevated gold prices for the next decade suggests the bullish factors fueling gold’s rise will win out in the long run.
What does this mean for investors?
Central bank gold demand is one of the primary drivers behind the yellow metal’s prices. Despite record-setting gold purchases over the past few years, the World Gold Council expects more highs in 2024. This forecast indicates that gold’s rally might just be getting started. In fact, many experts are already increasing their gold price predictions on the back of peak levels due to the insatiable central bank appetite for gold. Savvy investors are taking cues from the world’s largest investors – central banks – by scooping up more physical gold before prices move higher.
