Chinese Gold demand was steady in July

Despite gold's sideways price performance and increased volatility, Chinese gold demand remained generally stable in July.

China ranks as the world’s biggest gold market. 

The gold price in yuan was virtually unchanged in July. According to the World Gold Council's gold return attribution model, a weaker dollar and improved investor positioning supported the yellow metal, while rising yields continued to create headwinds.

Chinese gold demand has been bifurcated, with resilient investor buying and a struggling jewelry sector.

Withdrawals from the Shanghai Gold Exchange (SGE) fell by 8 percent in July, dipping to 80 tonnes. Banks, jewelers, and refiners pull gold from the SGE, and the volume provides a snapshot of wholesale gold demand in China.

The World Gold Council described wholesale demand as “tepid,” but noted that the decline was “largely seasonal.”

“The jewelry sector is typically tepid in Q2 and early Q3.”

The WGC said data indicates that physical gold investment demand was “broadly unchanged” from June and failed to offset the decline in jewelry demand due to high prices.

Year-on-year, SGE withdrawals are down 15 percent, reflecting a softer jewelry market and a higher gold price. They are also coming off extremely high demand numbers from last year.

ETF flows indicated a modest resurgence in investment demand in July.

Five tonnes of gold flowed into Chinese gold-backed funds last month. That pushed ETF assets under management (AUM) up 3 percent to ¥250 billion ($37 billion).

ETFs are a convenient way for investors to play the gold market, but owning ETF shares is not the same as holding physical gold.

According to the World Gold Council, investment interest was buoyed by several factors.

“Recurring geopolitical uncertainty, weaker equities, and persistent gold accumulation by the PBoC. Meanwhile, rising institutional investor participation as the gold price stabilized also supported demand in the month.”

In another sign of bullish sentiment, net longs on the Shanghai Futures Exchange rose 24 tonnes to 117 tonnes at the end of July.

Meanwhile, Chinese gold imports rose to a two-year high in June as lower prices sparked a resurgence in demand.

Looking ahead, World Gold Council analysts said investment demand will likely improve if the price continues to break higher. Wholesale demand could also get a boost from seasonal jewelry inventory replenishment. 

However, there are some potential headwinds if the domestic equity rebound that started earlier in August persists.