Chinese investment demand sags but expected to rebound

Chinese investment demand has served as one of the primary drivers of the gold bull run so far, but it has ebbed in recent weeks with a surge in the Chinese stock market. However, World Gold Council analyst Ray Jia says he expects investment demand to rebound amid the renewed gold price strength.

China ranks as the world's largest gold market. 

After hitting a record high in April, gold consolidated and traded sideways through most of the summer, before surging higher in late August.

According to the World Gold Council, “The lack of a clear trend in the gold price in most of August led to investors waiting on the sidelines.” 

However, the yellow metal charted another breakout beginning at the end of August, and over the past several weeks, gold hit a series of new record highs. Jia said this will likely reignite investor interest.

Gold was up 3.9 percent in dollar terms in August. It charted a 2 percent increase in yuan terms. The smaller gain was due to the yuan's strength against the dollar.

The CSI300 Stock Index jumped 10 percent in August, diverting Chinese investor attention to equities. As a result, Chinese ETFs reported outflows of gold totaling ¥6 billion (US$834 million) in August.

Chinese ETF gold holdings fell 7.7 tonnes to 189 tonnes.

The range-bound price and surging stock prices also dented gold bar and coin sales, which were exceptionally strong through the first half of the year and helped drive the price higher.

Chinese bar and coin demand grew by 44 percent year-on-year in H1. Chinese investors snapped up 115 tonnes of gold bars and coins in the second quarter alone. It was the strongest H1 for physical gold buying since 2013.

Given the rapidly increasing price, it was inevitable that demand would slow. However, the anticipation of further price gains will likely reignite investor interest.

A month-on-month decline in gold withdrawals from the Shanghai Gold Exchange (SGE) last month reflected the sagging wholesale demand.

Overall, wholesale demand fell 9 tonnes month-on-month in August, totaling 85 tonnes. It was a 17-tonne year-on-year decline, the weakest August since 2010.

However, according to the World Gold Council, investment weakness masked a rebound in jewelry demand. This was evidenced by increased replenishment activities by jewelers ahead of Chinese Valentine’s Day (Aug. 29).

Jewelry sales have faced headlines with the higher gold price. However, the World Gold Council expects demand to pick up as retailers step up replenishment efforts ahead of the National Day Holiday in early October, along with various jewelry fairs in September that also tend to support wholesale demand.

Interestingly, wholesale gold demand is well below the 10-year average. This is notable given the fact that Asian demand, led by China, has been one of the primary forces behind gold’s upward trajectory over the last 18 months. It indicates that there may still be significant untapped demand in China.

In a sign that wholesale gold demand is expected to rebound, gold imports increased in July, coming in at 89 tonnes. That represented a 50-tonne rise month-on-month, and it was 53 tonnes higher year-on-year.

Earlier this year, the People's Bank of China raised gold import quotas to meet surging demand. 

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