Chinese demand will continue to support the gold market after the sharp drop from record highs -Metals Focus
Gold has suffered significant losses this week as speculative investors focus on the Federal Reserve delaying its easing cycle until after the summer or even after the 2024 U.S. elections in November.
Although prices have room to move lower in the near term, one research firm noted that fundamental demand from Chinese and other Asian investors remains strong and should continue to support higher prices through 2024.
Gold demand in China has been so strong that retail investors have been paying an elevated premium since late 2023. The price premium for gold traded on the Shanghai Gold Exchange has traded consistently around $40 above the gold benchmark established by the London Bullion Market Association through the early part of 2024.
In a recent research report, analysts at Metals Focus noted that historically, Asian investors have sold into rising gold prices; however, this rally has been different as demand for physical bullion has remained strong as prices pushed to record highs above $2,400 an ounce.
“Although sharp price gains have weighed on jewellery consumption, bullish price expectations (and a lack of alternative investment options in some countries) have, in fact, helped boost demand for bars and coins and have limited the scale of profit taking in Asia and the Middle East,” the analysts said in a recent report. “Even with a further decline in Western retail investment, global sales of small bars and coins are still expected to edge slightly higher in 2024.”
Metals Focus said that it expects to see healthy gold demand in China this year, which comes on top of a 28% increase in 2023.
The analysts noted that a significant factor behind Chinese gold demand is that investors have very few options to protect their wealth as economic uncertainty rises.
“It is worth noting that in 2023, total area and sales of commercial housing sold was down 8.5% and 6.5%, respectively y/y. Turning to equity markets, the Shanghai Composite Index and Shenzhen Component Index were under pressure for much of last year while their recent rebound seems to have stalled,” Metals Focus said. “All this is benefiting gold’s appeal as a safe haven and portfolio diversifier, among investors.”
The analysts also noted that consumers are just following the government’s lead as the People’s Bank of China has bought gold for 17 straight months.
“The PBoC’s ongoing diversification into gold most probably reinforced local investors’ belief in the metal and solidified its role as a hedge against market turmoil and financial instability,” the analysts said.
Source: https://www.kitco.com/