What’s Behind China’s Gold-Buying Spree?
Wed Aug 14 2024
With prices reaching all-time highs in July above $2,450 per ounce, the gold market has been in fine fettle of late. With a price rally that has now broadly persisted for almost two years, the precious metal has been among the best-performing commodities since late 2022. And with China’s gold-buying frenzy, which began in earnest in November 2022, unlikely to be over just yet—albeit having decisively paused in recent months—further gains for gold remain on the horizon this year.
2023 was a particularly colossal year for the People’s Bank of China (PBoC)-led gold splurge that was observed across the world, a year in which China’s central bank bolstered its gold purchases by a hefty 30 percent. According to the World Gold Council (WGC), central banks led by China purchased 1,037 tonnes (t) (metric tons) of gold last year, with the PBoC buying more gold than all other central banks combined. This buying intensity continued well into 2024, with net purchases of 290 tonnes recorded in the first quarter (Q1) of 2024—the fourth strongest quarter of purchases since the buying streak began in 2022—with China again leading the way.
Indeed, the first quarter’s acquisitions were around 36 percent higher than the quarterly pace of around 213 tonnes implied by J.P. Morgan Research’s annual estimates of 850 tonnes for 2024. “The 70-tonne increase in net purchases versus the fourth quarter of 2023 is also despite a 5 percent quarter-on-quarter increase in the average price of gold,” the bank’s research division wrote on July 15, while the WGC also recorded a 29-tonne boost in China’s net gold purchases for the first half of 2024, which raised its total holdings by 1.3 percent.
Although China’s gold-mining operations produce more gold than any other country, the PBoC and consumers continue to import substantial amounts. The last two years have seen China purchase more than 2,800 tons of gold from overseas locations, which, according to Bloomberg, is more than all the metal that backs exchange-traded funds (ETFs) around the world or about a third of the stockpiles held by the United States’ Federal Reserve (the Fed). “China is unquestionably driving the price of gold,” Ross Norman, chief executive of MetalsDaily.com, a precious-metals information platform based in London, told the New York Times on May 5. “The flow of gold to China has gone from solid to an absolute torrent.”
Yet, despite its clearly voracious appetite for the yellow metal, China firmly put the brakes on its gold-buying recently, with the PBoC reporting its gold reserves as unchanged in June for the second consecutive month at 2,264 tonnes, or 4.9 percent of its total reserves. This pause thus interrupted a gold-buying spree that had lasted for a whopping 18 months. With the extent of price appreciation that has transpired this year, J.P. Morgan stated that central banks would be buying more gold “structurally” and becoming “more tactical” around price.
Nonetheless, gold ETFs in China continue to experience net positive accumulation, with the WGC noting a seventh consecutive monthly inflow in June that pushed collective holdings to an all-time high of 92 tonnes and raised total assets under management (AUM) to a record high of RMB51 billion (US$7 billion). And by attracting a whopping RMB17 billion ($2.3 billion) across the first half (H1) of 2024, Chinese gold ETFs have posted the highest first half of any year on record, with the country’s gold ETF demand comfortably outpacing all others during the January-June period.
So, what’s behind this China-led gold-buying fever, then? J.P. Morgan identified several factors motivating investors to boost their exposures, which, in turn, have been driving global demand and sending prices higher. “Amid fraying geopolitics, increased sanctioning, and de-dollarisation, we observe an increased appetite to buy real assets, including gold,” Gregory Shearer, head of base and precious metals strategy at J.P. Morgan, recently remarked.
Indeed, the PBoC’s sizeable gold acquisitions could be seen in the context of its efforts to replace its US-dollar holdings. This is being carried out against a grim backdrop of rising tensions with the US, including an escalating trade war and US-led sanctions against China and Russia, all triggering a dramatic deterioration in relations between the economic superpowers. In response, China has been aggressively selling off its holdings of US Treasury securities as it seeks to effectively substitute its massive quantities of dollar reserves for more gold and ultimately boost the diversification of its reserves. While early 2022 saw China sitting on more than $1 trillion of US Treasuries, those holdings had dwindled to $768.30 billion by May 2024, as per official US government figures.
“The main motivation of the PBOC is to be less dependent on the US dollar and—in an extreme case—to be less susceptible to US sanctions,” Julius Baer analyst Carsten Menke recently told Reuters. Menke said he expected China’s desire to diversify its reserves to persist, as “the geopolitical tensions between China and the United States are unlikely to disappear anytime soon, independent of the outcome of the US presidential elections”.
China’s expedited de-dollarisation efforts are also being driven by its commitments to BRICS+, the global economic group of emerging economies founded by Brazil, Russia, India, China and South Africa that recently added Iran, Egypt, Ethiopia, Saudi Arabia and the United Arab Emirates (UAE) to its list of members. This expanding bloc has been clear about its desire to not only unleash new opportunities for trade and investment among its member nations but also to almost exclusively utilise local currencies in bilateral trade at the expense of the US dollar.
Ongoing discussions of a BRICS currency that is backed by gold may also explain the fervent buying trends of the precious metal in recent years. The World Bank noted that as of Q1 2024, the aggregate central-bank holdings of gold within the BRICS+ nations represented nearly 17 percent of all the gold held in the world’s central banks, with Russia, India and China sitting within the global top 10. And while no official confirmation of a new currency has been forthcoming thus far, speculation that gold-backed BRICS money is in the offing continues to grow.
“What do you think is going to happen to the dollar over time?” author and investment banker Jim Rickards recently asked during his talk at the New Orleans Investment Conference, adding that a strengthening BRICS currency against the dollar would be pivotal in leading to an eventual collapse of the US currency. Rickards also observed that the 11 member nations of BRICS+ already represent 15 percent of global gold reserves, 30 percent of land, 40 percent of the world’s population and 54 percent of global gross domestic product (GDP). “We’re trading closer to a point where the BRICS are in control of overland routes and choke points around the world,” he added. “Don’t look for the dollar to go away anytime soon, but look for a much higher dollar price of gold and a much weaker dollar and the BRICS coming into their own.”
In the meantime, the PBoC’s pause in gold-buying has some tongues wagging that its record-buying spree is over. That said, much of the public analysis perceives the respite to be brief, with the steep ascent in gold prices likely causing the PBoC to hold off for the time being. “Beijing’s gold buying, which helped the spot price rally in April and May, is no longer perceived to be immune to price sensitivity, but ongoing geopolitical risks are expected to keep its longer-term programme to diversify exposure from U.S. dollar-denominated assets active,” a recent Reuters report also noted.
J.P. Morgan echoed this view, predicting that central banks and other physical-gold consumers will remain strong buyers during any forthcoming dip in prices and will thus support a higher overall price floor for gold. “We think the price level of gold has minimal impact on long-term central bank acquisition plans, however, price changes do appear to influence the pace and cadence of net purchasing,” according to Gregory Shearer.
Others point to the PBoC’s overall gold holdings still being a modest share of its overall reserves compared to those of other major economies. “China’s gold reserves need to rise in absolute and relative terms because they do not match the status of the world’s second-largest economy, and gold’s share of its reserves is the lowest of any major economy,” a recent Reuters report stated, quoting an unnamed Chinese policy insider involved in internal discussions, who attributed the pause in buying to high prices.
“But we need to look at prices—it’s impossible for the central bank to maintain a constant amount of purchases each month,” the insider added, citing geopolitical factors spurred by the Russia-Ukraine war and the Middle East conflict among the drivers of China’s gold demand in recent years.
“Despite a recent slowdown, gold’s strong performance so far in 2024, local asset uncertainty and risks associated with the economic outlook should bode well for bar and coin sales in China,” according to the WGC. Philip Klapwijk, managing director of Hong Kong-based consultant Precious Metals Insights, meanwhile, predicted further growth in demand for gold’s safe-haven appeal amid China’s limited investment options, protracted property-sector crisis, volatile stock markets and weakening yuan. “The weight of money available under these circumstances for an asset like gold—and actually for new buyers to come in—is pretty considerable,” Klapwijk told Bloomberg in April. “There isn’t much alternative in China. With exchange controls and capital controls, you can’t just look at other markets to put your money into.”
Source: https://internationalbanker.com/