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China continued to dominate the gold market in 2023, but equity rally could sap demand

China’s volatile economic recovery in 2023 played an important role in the gold market and could continue to dominate the global landscape, according to some analysts.

In a report published last week, the World Gold Council said that gold outperformed major Chinese assets as it saw a 17% increase against the renminbi. The move outpaced gold’s 14% gain against the U.S. dollar.

“This strength in the RMB gold price relative to its USD peer was mainly a result of the local currency’s weakness. Both benchmarks saw their highest daily close on 28 December 2023,” said Ray Jia, senior analyst at the WGC and author of the report.

While gold hit all-time highs against both the U.S. dollar and renminbi last month, he noted that the Chinese market saw solid demand through most of the year.

Jia noted that the price premium between Shanghai and London hit a record annual average of $29 an ounce or 1.5%.

“On a monthly average basis, September’s US$75/oz (3.9%) was the largest. And the daily record was set on 14 September 2023, when the local gold price premium reached US$121/oz, or 6.4%,” he said.

Along with rising demand, September’s record premium was also driven by a lack of supply as the government temporarily curbed gold imports in an effort to strengthen the renminbi. The curbs were lifted shortly after premiums hit record highs.

Jia noted domestic gold demand was driven by ongoing economic uncertainty as consumers used gold to preserve their wealth and protect them from weakening assets and a depreciating currency.

Consumers moved into gold as the People’s Bank of China reported record-high saving rates through most of 2023.

“Its eye-catching performance and strong local and global central bank purchases led to extensive coverage by local media. And gold’s attractiveness was further boosted by the increasing need of households to preserve value: the local gold price’s outstanding performance drew their attention when the currency and other Chinese assets weakened,” Jia said in the report. “We believe too that the ongoing innovation from gold jewellery manufacturers – widening their product ranges and adapting to changing consumer taste – helped improve demand.”

Along with rising consumer demand, China’s central bank was also a major gold buyer last year, leading the global trend.

“In 2023, the central bank announced a 225t increase in their gold reserves, which reached 2,235t by the end of December,” Jia said. “Gold now accounts for 4.3% of the nation’s official foreign exchange reserves. And during the past 14 months, China’s gold reserves have risen by 287t.”

Other institutions are also paying close attention to Chinese gold demand. Colin Hamilton, market analyst at BMO Capital Markets said that Chinese gold demand is an underappreciated driver within the global market.

Hamilton pointed out that Chinese households face a growing dilemma of where to put their increased savings. He noted that the household saving rate has been strongly correlated to domestic gold prices.

“Gold exposure has become a necessity for Chinese portfolios, as they continue to expect disinflation and income uncertainty,” he said.

However, Hamilton also warned that China’s growing influence in the gold market also presents a major risk for the market.

“Perhaps the largest downside risk to gold price this year would come from a risk-on environment in China, such as from an equity market rally,” he said. “The one thing we will be watching for is any sign of explicit Chinese government support for the domestic equity market, particularly given a 2024 policy objective is to ‘activate capital markets.’”

Source: Neils Christensen Kitco