EDITOR NOTE: Gold coin and bullion sales in China usually hit a seasonal low point in Q2. This year, we see something of an anomaly emerging, as Chinese gold sales are surging across the board--everything, from ETFs to physical to wholesale. In the meantime, the country has expanded its quotas on gold imports. The price of the yellow metal does tend to rise in China when stocks take a beating. But here we may be seeing something more than a temporary fear-driven hedge against volatility. We may be witnessing a strategic monetary buildout. On the government side of things, the accumulation of gold reserves may serve to back up the country’s forthcoming digital currency. On the retail investment side of things, we may be seeing not only an opportunistic gold grab at relatively discounted levels but also a gold rush in anticipation of a potential return to something of a gold standard. It’s important to note that last year, with President Trump in the White House and Dr. Judy Shelton nominated for a seat at the Federal Reserve, we were actually headed in that direction--that is until the results of the 2020 election came out in favor of Biden. Now, the Chinese government and its retail investing population are taking that route as America, optimistically recovering from the pandemic amid a massive vaccine rollout, stays behind the curve, enamored by stock market gains fueled by its slowly diminishing green paper.
Rising real rates continued to weigh on gold prices in March. Real yields in key regions climbed further – representing an opportunity cost to hold gold and reflecting improved economic conditions in these markets, as well as investor expectations of higher inflation to come. Our short-term gold performance attribution model also suggests that the rising opportunity cost of holding gold last month was a major contributor to the subdued gold prices.
Gold price performances remained weak in March
Source: Shanghai Gold Exchange, ICE Benchmark Administration, World Gold Council
The Chinese economy kicked off 2021 with a strong Q1. In the first quarter of the first year of the nation’s 14th five-year plan – a plan sets out the country’s principal economic targets and policy priorities in the next five years – China’s y-o-y GDP growth reached 18.3% - the highest on record – and local residents saw their disposable income increase by 13.7% y-o-y.
Compared to Q1 2019, Chinese residents’ disposable income and the nation’s GDP in the first quarter were 10.3% and 14.8% higher respectively. And anecdotal evidence suggests that local gold consumption usually benefits from a strong economy.
China's economy in Q1 saw strong growth
Source: National Bureau of Statistics, World Gold Council
Despite the m-o-m rebound, Au(T+D)’s trading volumes fell by 79% y-o-y in March. More trading days in March than in February were the chief driver of the 44% m-o-m increase; however, two main factors underpin the y-o-y plunge in the contract’s trading activities:
- volatility in the local gold price was significantly lower than March 2020, diminishing the contract’s attractiveness to short-term traders
- one year ago gold was headlining local news amid the COVID-19 pandemic and was enjoying a surge in related safe-haven demand
Au(T+D)'s trading volumes rebounded m-o-m but fell sharply y-o-y
Source: Shanghai Gold Exchange, World Gold Council
Chinese gold ETF total holdings stood at 72.4t (US$3.9bn; RMB25.8bn) as of March, 5.3t (US$287mn; RMB1.9bn) higher m-o-m. In tonnage terms, Chinese gold ETF holdings set a new record in March and in value terms, the second highest.
Chinese gold ETF holdings set a new record in March
Source: ETF providers, World Gold Council
A turbulent stock market remained the main driver of inflows into Chinese gold ETFs last month. Due to pullbacks amid lofty valuations, the CSI300 stock index ended March with a 5.4% decline and showed the highest volatility since last August. As volatility climbed, the Baidu Search Index of gold – measuring the frequency of online searches using the keyword “gold” via Baidu – rose synchronously, implying an elevated interest in gold from potential investors.3
Heightened stock market volatility has spurred local interest in gold
Source: Wind, Baidu Index, World Gold Council
Gold withdrawals from the SGE last month totalled 168t, 75t higher m-o-m and 85t higher y-o-y. Gold retailers replenishing their stocks, more working days in March than February and the low base from 2020 were key to the m-o-m and y-o-y increase in China’s wholesale gold demand as mentioned in my last monthly update. Even though the Q1 total hasn’t yet recovered to pre-pandemic levels, in our recent visits we found major Chinese jewellers to be optimistic about the future. They tell us their positivity is backed by:
- improved economic conditions and the nation’s domestic consumption stimuli
- the potential boosts brought to gold consumption from the inconvenience to travel amid pandemic related restrictions
- a lower gold price than last year.
The wholesale physical gold demand in China rebounded
Source: Shanghai Gold Exchange, World Gold Council
The Shanghai-London gold price spread rose further in March, reaching US$10.2/oz on average, edging closer to the 2019 average of US$11/oz. As mentioned earlier, China’s wholesale gold demand picked up during the month, supporting the local gold price premium. Data from the National Bureau of Statistics also shows that China’s gold, silver, jade and gem jewellery retail sales in March were 83% higher y-o-y and 18.7% higher than 2019.
The Shanghai-London gold price premium continued to rise
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.
Traditionally Q2 is the low season for gold consumption in China, especially for gold jewellery sales. This is primarily due to consumers choosing lighter gold jewellery pieces as temperatures rise and fewer outdoor activities take place. This may cause China’s wholesale gold demand to be negatively impacted in the upcoming months.
Q2 is usually an off season for gold consumption in China
Average quarterly consumption of gold jewellery, bars and coins in China between 2010 and 2019*