China influencing global gold prices with robust demand

With waning confidence in conventional investments like real estate and stocks, Chinese consumers have turned to gold, bolstering its demand. Concurrently, China’s central bank has been steadily increasing its gold reserves while reducing its holdings of US debt, a New York Times report revealed.

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Adding to this, Chinese speculators are anticipating further appreciation in gold’s value. China’s already substantial impact on gold markets has become even more pronounced during this recent bullish trend, marked by a nearly 50 per cent surge in global prices since late 2022.

Remarkably, gold has continued its growth despite factors that traditionally dampen its appeal, such as higher interest rates and the US dollar.

As per Reuters, this week, physical gold demand in India stayed muted despite a minor price correction, with buyers anticipating a further decline. Meanwhile, Chinese premiums experienced a second consecutive week of decline due to sluggish demand during the holiday period.

In India, the world’s second-largest gold consumer and a significant importer, domestic prices dropped to approximately 70,500 rupees per 10 grams this week, following a record high of 73,958 rupees last month.

Last month, gold prices surged despite the Federal Reserve’s indication of maintaining higher interest rates for an extended period. Furthermore, gold has sustained its appreciation despite the strengthening of the dollar against nearly all major currencies worldwide this year.

Although prices have retraced to approximately $2,300 per ounce, there is a prevailing sentiment that the gold market’s dynamics are now dictated less by economic fundamentals and more by the preferences and actions of Chinese buyers and investors.

Gold consumption in China saw a 6 per cent rise in the first quarter compared to the previous year, as reported by the China Gold Association. This uptick follows a 9 per cent increase observed last year.

Amid average performance of traditional investments, gold has emerged as an increasingly attractive option. China’s real estate sector, typically the primary destination for families’ savings, remains in turmoil. Similarly, investor confidence in the country’s stock markets has yet to fully recover, with several major investment funds targeting the affluent facing setbacks due to unsuccessful ventures in real estate.

With limited superior alternatives available, funds have been redirected towards Chinese gold and many young individuals have turned to investing in gold in small quantities.

Despite Beijing’s gold acquisitions, it constitutes around 4.6 per cent of China’s foreign exchange reserves. In contrast, India holds nearly twice as much of its reserves in gold, in percentage terms, NYT report stated.

Speculators in Shanghai markets have been closely watching the trend of strong retail demand from Chinese consumers and steady central bank purchases, betting that it would continue. Notably, the average trading volume for gold on the Shanghai Futures Exchange surged by more than double in April compared to the previous year.

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