The largest official sector buyer of gold, China, is expected to resume its bullion shopping once prices ease from the record highs experienced in May. This information was revealed at a recent conference where industry players discussed the fundamental case for the metal moving forward. Despite a pause in their gold reserves in May, the People’s Bank of China (PBOC) is simply waiting and watching for the right moment to resume their purchases.
Following the news of unchanged gold holdings by the PBOC in May, global spot prices experienced a sharp decline. Benchmark spot gold traded around $2,300 per ounce after the biggest daily drop in 3-1/2 years. The record high of $2,449.89 per ounce in May was triggered by interest rate cut expectations and central bank buying due to geopolitical tensions.
In 2023, China emerged as the largest official sector buyer of gold with significant net purchases of 7.23 million ounces. The World Gold Council (WGC) reported that China’s central bank added 60,000 troy ounces of gold to its reserves in April alone. The PBOC strictly controls the gold entering China through quotas given to commercial banks, indicating a strategic approach to their gold reserves.
Central Banks’ Gold Exposure
Central banks across the globe are planning to increase their exposure to gold in the next 12-24 months, according to a survey conducted by the Official Monetary and Financial Institutions Forum. China, being a key player in the gold market, is expected to continue buying gold in the coming months. This bullish sentiment is driven by geopolitical tensions and upcoming elections worldwide.
Historically, gold has been considered a safe haven asset against geopolitical and economic risks. This reputation has led to gold being a preferred investment choice in China, especially during times of economic uncertainty and currency fluctuations. The weaker yuan and persistent economic worries further strengthen the case for investing in gold as a protective measure.
Despite minimal gold buying activity in April and none in May by China, analysts are optimistic about future purchases. The StoneX analyst, Rhona O’Connell, noted that the recent pause does not suggest a long-term shift in China’s gold buying behavior. Expectations are high for China to resume reporting gold purchases once prices correct to more favorable levels.
In response to the historical highs reached by gold prices, the Shanghai Gold Exchange raised margin requirements for some gold futures contracts. This 1% increase from 8% to 9% aims to regulate trading activity and stabilize the market in the face of volatile price fluctuations.
China’s anticipated return to gold purchases once prices ease indicates a strong belief in the metal’s long-term value and stability. With central banks worldwide increasing their exposure to gold and the ongoing geopolitical tensions, the future of the gold market looks promising despite short-term fluctuations. As an essential hedge against economic risks and uncertainties, gold continues to play a crucial role in investment portfolios globally.