Analysis - China's gold buying break seen as fleeting given its long-term needs
China still has plenty of appetite for official gold purchases despite pausing in May and June, as its bullion holdings remain low as a share of reserves and geopolitical tensions persist, according to a policy insider, industry experts and data.
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.
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, said a Chinese policy insider involved in internal discussions who declined to be named due to the sensitivity of the matter.
"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 said, adding that geopolitical factors spurred by the Russia-Ukraine war and the Middle East conflict were among drivers of China's gold demand in recent years.
Officials at the central bank, the People's Bank of China (PBOC), have never publicly commented on what prompted a resumption in gold buying in November 2022 after a more-than three-year pause.
Eight months after Western sanctions froze $300 billion of Russia's official reserves, about half of Moscow's total, the PBOC started reporting gold purchases and kept doing so for 18 months, forming a pillar for global gold prices to hit record highs in 2024.
The PBOC was the world's largest single buyer of gold in 2023, with its net purchases of 7.23 million ounces the most by China for at least 46 years, according to the World Gold Council.
But when it made no purchases in May and June this year, spot prices came under pressure, leaving the market guessing about China's future appetite.
The policy insider attributed the pause in buying to "high prices". The spot price, which regained ground after a dip in June, hit a record high during trading on Wednesday on improved U.S. rate cut hopes.
The PBOC and foreign exchange regulator State Administration of Foreign Exchange did not respond to Reuters' requests for comment.
China has the world's largest foreign currency reserves, at $3.22 trillion in June. But gold's share of China's overall reserves, which include its reserve position and special drawing rights (SDRs) at the International Monetary Fund, while at a record high of 4.9% is low compared to the global average of 16%.
Source: https://finance.yahoo.com/