(Kitco News) – Gold’s recent all-time high prices were even more dramatic in China’s local currency, and while this dampened jewelry demand last month, Chinese investors continue to see high prices as a positive, according to the latest report from Ray Jia, Head of Research for China at the World Gold Council (WGC).
Jia noted that Chinese gold prices ended Q1 strong, as the afternoon Shanghai Gold Benchmark price (SHAUPM) in yuan rose by 10% in March, outstripping the 8% gains of the morning LBMA Gold Price in USD.
“While the LBMA Gold Price AM saw the largest increase in 12 months, the SHAUPM in RMB rose the most since August 2019 helped by a weaker local currency,” he wrote. “Drivers such as strong investment demand for gold globally, elevated geopolitical risks and investor positioning in the futures market contributed to gold’s strength.”
The strong March performance boosted gold’s Q1 return in yuan to 10%, outperforming other major assets such as global stock markets and other commodities. “And the attractive return, uncertainties in the property sector and concerns for the local currency have elevated local investor appetite for gold so far in 2024,” Jia said.
Turning to the demand picture, Jia noted that even with a dip in March due to sky-high prices, wholesale demand was strong overall in Q1. “During the month, the industry withdrew 124t of gold from the SGE, a mild 3t m/m fall and a 33t drop y/y,” he said. “Compared to previous years the m/m decline was atypical: March tends to see seasonal growth as manufacturers restock after the traditional sales boost of the Chinese New Year (CNY) holiday, which usually occurs in February. Conversations with gold market participants indicate that gold jewellery retailers were hesitant to replenish stocks amid the rallying price; this was a key factor behind the y/y fall in March withdrawals too.”
In contrast, Sales of bars and coins remained strong throughout the month, however, as investors were drawn to gold amid new record high prices. “Strong investment demand for gold may have partially negated gold jewellery market weakness, resulting in only a mild m/m decline in March withdrawals,” Jia said.
In quarterly terms, wholesale demand was strong by historical measures, with 522 tonnes of gold withdrawals from the SGE during Q1, 57 tonnes higher year-over-year for the highest first quarter since 2019. “Furthermore, withdrawals stand 43t above the 10-year average,” Jia noted. “Despite a weaker-than-usual March, the strongest January on record and the above-average February shored up Q1 wholesale demand. Active retailer replenishment ahead of the CNY, healthy consumption in early 2024, and elevated investment demand throughout Q1 were key contributors.”
The fluctuations in wholesale demand witnessed in March also impacted local price premiums. “The Chinese gold price premium averaged US$26/oz in March, a US$21/oz fall m/m,” Jia wrote. “In general, the m/m drop reflected weaker local gold demand, especially in the jewellery market as noted above. And the spread averaged US$40/oz in the first quarter, the highest Q1 ever, mirroring robust local demand mentioned above.”
Inflows into Chinese gold ETFs were strong during the month. “The gold price rally attracted inflows into Chinese gold ETFs, adding RMB1.2bn (US$164mn) in March, the fourth consecutive monthly inflow,” Jia said. “Continued inflows and a surge in the local gold price pushed Chinese gold ETF AUM to another record high, reaching RMB35bn (US$5bn) by the end of the month. Meanwhile, holdings rose by 2.2t to 67t, 8t shy of the month-end peak of 75t in December 2021.”
In quarterly terms, Chinese gold ETFs also saw significant positive flows with 2.8 billion yuan ($386 million) in inflows in Q1. “And these inflows have been relatively evenly distributed each month, suggesting that they were not solely driven by the March price surge; in fact, rising safe-haven demand amid property sector concerns and local currency volatility were key drivers too,” Jia pointed out. “While holdings rose by 10% during the first quarter, AUM (in RMB) jumped by 20% thanks to a rocketing RMB gold price.”
The People’s Bank of China (PBoC) also continued its gold purchasing spree in March, with China’s central bank announcing its 17th consecutive monthly purchase. “China’s gold reserves rose by 5t in March, pushing the total to 2,262t,” Jia noted. “Currently, gold accounts for 4.6% of total foreign exchange reserves, a notable increase on previous months amid the gold price surge. During the first three months of 2024 the PBoC reported gold purchases of 27t.”
“China’s gold reserves have risen by 314t since November 2022, the time at which the PBoC resumed reporting,” he added. “During the same period foreign exchange reserves rose by 5% in dollar terms and official gold tonnage holdings jumped by 14% – their total value surging by 44%.”
And while the official import data for March has yet to be released, gold imports accurately reflected local demand during the first two months of 2024. “China imported 160t gold in January on a net basis, a significant 104t m/m rise and the strongest January on record according to the latest data from China Customs,” Jia said. “This was mainly driven by the strongest ever January wholesale demand and the significantly higher local gold price premium.”
February’s net imports were 79 tonnes, a drop of 82 tonnes compared to the standout January number. “The sharp m/m pullback also mirrored changes in February’s wholesale gold demand,” he noted. “Fewer trading days in the month due to the CNY also impacted imports.”
Looking ahead, Jia wrote that seasonal factors will depress wholesale demand, but he expects to see continued interest from China’s investment community.
“As we enter the traditional off season for demand, gold jewellery consumption is likely to remain tepid, especially with a local gold price that keeps refreshing record highs,” he said. “On the other hand, the shining performance of gold compared to other local assets has attracted increasing attention from investors. And this could mean continued strength for gold investment demand in China.”
