China will maintain a firm grip on the gold market in 2025 - Capital Economics
Fri Dec 27 2024
China played a pivotal role in the gold market in 2024 as consumer demand and central bank purchases drove prices to record highs in the first half of the year. A slowdown in the second half of the year, as the People’s Bank of China paused purchases for six months and a sharp drop in gold imports occurred, hasn’t derailed the nation’s influence in the precious metals market.
Looking ahead to the new year, one research firm expects Chinese gold demand to remain strong through 2025, providing critical support for prices. Hamad Hussain, Assistant Climate and Commodities Economist at Capital Economics, said that soft economic activity and a weak renminbi will drive gold demand in China next year.
“We think that the slow-motion collapse of China’s property sector will be a major headwind to economic growth and boost safe-haven demand for gold,” he said in a recent research note. “Moreover, a worsening of the property crisis would also boost the relative attractiveness of gold as an investment vis-à-vis other assets.”
Hussain added that for Chinese consumers, “all roads lead to gold.”
Although gold has always been an important asset among Chinese investors and consumers, many analysts have seen growing downside risks to demand as the government is expected to support the Chinese economy with significant quantitative easing measures.
However, Hussain noted that China’s stimulus measures have fallen well short of expectations, which should create new momentum in the gold market.
Not only has the Chinese government failed to instill confidence in its economy, but Hussain also noted the growing threat from incoming President-elect Donald Trump, who has threatened to impose significant tariffs on Chinese goods.
The British research firm also expects this environment to weaken the renminbi.
“We now think that the renminbi will depreciate by about 10% to partially offset the impact of tariffs. For what it’s worth, whilst a currency depreciation to its weakest level since 2006 would significantly increase the cost of purchasing gold in China, the perception of gold as a safe-haven asset means that gold imports tend to rise as the renminbi weakens,” he said.
However, consumer demand is just one side of the bullion coin. Capital Economics also expects that China’s central bank will continue to buy gold and diversify away from the U.S. dollar.
Updated reserve data published at the start of the month showed that the PBOC bought five tonnes of gold in November. Some analysts considered this a paltry purchase; however, it does show that after a six-month hiatus, the central bank remains interested in gold.
“China’s central bank (PBOC) will continue tilting its $3 trillion stock of reserves towards gold – the metal only makes up about 5% of total reserves, which is less than India’s central bank (9.3%), let alone the BoE or ECB,” said Hussain. “Following a six-month hiatus, the PBOC – which has bought more than double the amount of gold than any other central bank since 2022 – resumed buying gold in November.”
With solid demand coming from China, Hussain said that he expects gold prices to continue to defy their traditional obstacles of higher bond yields and a stronger U.S. dollar. There are growing expectations that the Federal Reserve will shorten its easing cycle with only two rate cuts next year, which would support elevated yields and resilient strength in the U.S. dollar.
“Overall, whilst we expect the US dollar to strengthen and Treasury yields to rise next year, which would typically point to lower gold prices, we still think that support from strong Chinese demand, amongst other non-traditional drivers, will result in gold prices reaching $2,750 by end-2025,” Hussain said.
Source: https://www.kitco.com/