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China's Gold Demand Remained Steady While Prices Rose In October

Chinese Gold demand
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EDITOR'S NOTE: The price of gold is up, and China is setting new record-highs in gold holding, according to Gold.org. The gold-centric site reports that thanks to inflation and growing demand for Heritage gold jewelry in China, the country is holding record amounts of gold right now, which is good for gold prices. The site writes, “Collective holdings in China’s gold ETFs amounted to 74t (US$4bn, RMB27bn) at the end of October following five consecutive monthly inflows, the highest AUM on record in tonnage terms. Year-to-date inflows into Chinese gold ETFs reached 12t.” Whether this trend in gold demand will continue is uncertain but looks promising because of growing inflation and economic uncertainty. The only issue could be the worsening Chinese economy stifling the demand for luxuries like gold jewelry. 

Gold prices rebounded and Shanghai-London spread stabilised

Gold prices rebounded in October mainly thanks to surging inflation expectations, rising net longs at the COMEX, and a weakening dollar in the month. The LBMA Gold Price AM in USD and the Shanghai Gold Benchmark Price (PM) in Chinese Yuan (CNY) rose 3.8% and 2.3% respectively. The appreciating CNY against the dollar might be the key driver of the weaker gold price performance in RMB relative to it.

The local gold price premium averaged US$7.4/oz in October, virtually unchanged m-o-m. As the seasonally strong quarter for China’s gold consumption unfolds, local physical gold demand remains elevated on the back of a robust Q3, supporting the Shanghai-London gold price spread.

The local gold price premium remained stable

Source: Bloomberg, Shanghai Gold Exchange, World Gold Council
SHAUPM vs LBMA Gold Price AM after April 2014; before that, Au9999 vs LBMA Gold Price AM is used; click here for more.

Chinese gold ETF tonnage holdings set a new record

Collective holdings in China’s gold ETFs amounted to 74t (US$4bn, RMB27bn) at the end of October following five consecutive monthly inflows, the highest AUM on record in tonnage terms. Year-to-date inflows into Chinese gold ETFs reached 12t. The 2t inflow into Chinese gold ETFs during October drew support from two main factors:

  • the steady rising gold price might have attracted trend-following local investors
  • disappointing economic growth weighed on the risk appetite of local investors, leading to a 0.6% decline in the Shanghai Stock Exchange Composite Index and a 35% m-o-m drop in its daily trading volumes in the month.

Chinese gold ETF holdings reached 74t, the highest ever

Source: ETF providers, Shanghai Gold Exchange, World Gold Council

October’s wholesale physical gold demand is stronger than previous years, gold imports rose further in September

Gold withdrawals from the SGE totalled 137t in October, 28% lower m-o-m. This m-o-m decline is seasonal: physical wholesale gold demand in China tends to be lower in October as manufacturers’ stocks remain ample following their active replenishing in September. Also, fewer trading days in the month, due to the seven-day National Day Holiday between 1 October and 7 October, constitutes another key reason for the decline over the previous month.

Chinese wholesale gold demand tends to fall in October

Source: Shanghai Gold Exchange, World Gold Council
*Average monthly gold withdrawals from the SGE between 2010 and 2019.

Nonetheless, this October’s gold loadouts from the SGE were 45% higher y-o-y and 50% stronger than the pre-pandemic level in 2019 mainly due to:

  • A combination of stronger gold consumption in Q3 compared to the same quarters in 2020 and 2019,
  • Heritage gold jewellery’s popularity among young consumers has raised the industry’s expectation for Q4
  • Local jewellers are including more products of heavier weight in their inventories as their adoption of the per-gram pricing model increases: chunkier products lead to higher profits using this method.5

This October's gold withdrawals were stronger than 2020 and 2019

Source: Shanghai Gold Exchange, World Gold Council

As the latest data from China Customs shows, China imported 85t gold in September, 8t higher m-o-m. Similar to factors that drove up gold withdrawals in September, the appetite for gold imports usually rises prior to Q4 – which is the peak season for gold consumption in China.

This brings China’s total gold imports in the third quarter to 228t, 171t higher y-o-y and 43t higher than Q3 2019. There were two key drivers for this:

  • China’s gold consumption in the third quarter was higher than both 2020 and 2019 during the same period, resulting in higher import needs
  • China’s mined gold production has continued to fall over recent quarters and this, together with the significant curtailing of imports amid the COVID-19 related restrictions in 2020, meant that it was essential to replenish the nation’s gold inventory, especially in the face of robust demand.

You can find more details of China’s gold demand and supply in our recently published 2021 Q3 Gold Demand Trends report.

China's gold imports rose further in September

China's gold imports under HS code 7108

gold demand

Source: China Customs, World Gold Council

Looking ahead

Economic growth uncertainties might bode well for China’s retail gold investment demand

As Q3 GDP growth slowed, concerns around future Chinese economic performance intensified. Factors such as sporadic COVID-19 outbreaks and the rising stagflationary-like pressure could cause local investor risk appetite to fall, leading to higher demand for safe-haven investments such as gold ETFs or other physical gold products.

Chinese economy has been disappointing investors lately

gold demand

Source: Bloomberg, World Gold Council

In addition, the shift in focus towards sales of physical gold products at local commercial banks – a key driver of China’s Q3 retail gold investment – could further support local demand for gold bars and coins.

Seasonal strength in gold jewellery consumption might encounter some challenges

Looking ahead to the coming months the following factors should benefit local gold jewellery sales: historical patterns; the popularity of Heritage gold jewellery among young consumers; and the increasing efforts of local retailers to sell chunkier products – a result of the gradual shift in the gold jewellery pricing model as previously mentioned.

Even as the traditional peak season for gold jewellery sales unfolds, risks remain. Primarily, uncertainties around China’s economic growth could become a key challenge for China’s gold jewellery consumption as it is highly correlated with consumers’ disposable income. Alongside this, recent sporadic Delta outbreaks might cloud the outlook for gold jewellery retail sales. As such, we remain cautiously optimistic about China’s gold jewellery sales in coming months.

Q4's jewellery retail sales in China tend to be stronger

Monthly by month deviation from the 10-year average monthly jewellery retail sales in China*

gold demand

Source: National Bureau of Statistics, World Gold Council
*Note: Based on monthly retail sales data of all gold, silver, jade and gem jewellery products in China from the National Bureau of Statistics. January and February data are not available.

Originally posted on Gold.org.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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