In May 2024, the People’s Bank of China, for the first time in 18 consecutive months, stopped its long gold-buying spree when the price of gold had reached records. This surprise pause, now extended through July 2024, has been somewhat unexpected among those in the financial world since China has been a big player regarding gold demand worldwide. This buying spree for 18 successive months saw the PBOC amass a fortune and concentrate 72.8 million troy ounces of gold. Of course, the huge rise in price can be considered the main reason for ending the accumulation, with prices in May 2024 jumping to an all-time high of over $2,500 per ounce.
Context Behind the PBOC’s Pause
Several factors combined to send gold prices skyward in 2024: aggregating international economic uncertainty, including fears of loosening from the world’s leading central bank, the US Federal Reserve, intensified: markets dead-set on a buy-gold-first mentality and saw record-breaking, inflated demand. As stated above, gold’s modern-day, technologically advanced age was born. Central banks, especially the world’s 2nd largest foreign exchange reserve holder, the PBOC, were essentially stampeding the market. China, as usual, was reactively and proactively doing its own thing, this time diversifying its foreign exchange reserves to respond to these prevailing international economic winds and reactive fears and mitigate risks to the yuan.
Particularly in China, traditionally a bullion-loving country, gold has often been seen as a protective hedge against downturn and the depreciation of currencies, given global geopolitical tensions. So, when white-metal prices started to hit record highs, the PBOC’s decision to suspend buying was probably also driven by a very traditional official approach of not wanting to overpay for the metal. Nevertheless, with prices rising, the value of China’s gold reserves increased anyway – reaching $170.96 billion at the end of May, up from $167.96 billion a month earlier.
The Role of Global Central Banks
This move by the PBOC follows in the steps of central banks throughout the world. For the second year in succession global demand for gold remains strong on heightened economic instability and concerns about inflation, but a combination of factors has led many central banks to slow their purchases. In June 2024, Singapore massively cut its gold piles (the single biggest central-bank sell-off in over two decades). Central banks still intimately command gold market forces, and the sums bought or sold by them can move the needle for overall demand, and hence price. The importance of these institutions to the global gold landscape is further underscored by the fact that in 2023, China emerges as the single largest official buyer of gold.
The pause notwithstanding, analysts believe China is likely to get back into the gold market as soon as things steady. Saxo Bank head of commodity strategy Ole Hansen said that “China is nowhere near done buying gold,” but the current pause in its accumulation may be due to high price levels, which central banks, including the PBOC, would be unwilling to pay. We believe that the longer-term case for gold is still very much valid and that this could just be a period of transition in the prolonged consolidation of gold prices
Shifts in Domestic Demand
Official buying by the PBOC came to a halt, but domestic appetite in China presented a patchwork picture. First, on the one hand high prices are fundamentally leading to less demand for gold (as in gold jewelry consumers are not willing to pay such large premiums purely for investment purposes). Demand for gold bars and coins has risen, particularly from investors shopping for safe-haven assets. This has reinforced demand in the investment sector as investors in China and other parts of the globe view gold to preserve wealth during periods of economic dysregulation.
This trend indicates that gold is starting to be re-evaluated in China. Consumers may turn their backs on paying too much to adorn themselves with gold, but investors continue to jump at the chance to own stockpiles of gold to preserve wealth. This is especially the case with high-net-worth individuals and family offices who want to protect themselves from economic uncertainty.
Broader Implications for Gold Markets
The PBOC had announced no new gold purchases in over 39 months, a decision which would have far-reaching consequences for the global gold market. Gold prices, which reached new records in mid-2024 fell back a little after the news about China stopped its acquisitions. Nevertheless, there is still strong demand for gold in the long term as a haven and an inflation-fighting instrument. The precious metal’s position as a safe-haven asset also goes some way to explaining why it continues to be popular among both institutional and retail investors.
Over the long run, China is expected to continue using gold as a strategic tool to diversify its reserves and reduce U.S. dollar hegemony in global trade. China will continue its stockpiling of gold, especially as geo-political tensions rise and the global economies endure ongoing uncertainties, such a development the bullish sign for yellow metal.
Conclusion
China appears to have temporarily stepped back from being the lone gold buyer in town (and likely for a good reason with recent record high prices), as instead of gaining tonnes, its central bank added zero gold ounces for an 8th consecutive month. In turn, China is also the biggest gold buyer in 2023 and has a significant impact on global demand. Chinese buyers returning to the marketing the short term, the suspension has made its presence felt on gold prices worldwide, but over time prospects for Chinese physical demand appear bullish and most observers anticipate a return to buying from PBOC as soon as conditions are more favorable. At the same time, interest in gold as an investment option is strong both in China and worldwide as investors re-evaluate their thirst for stability amidst continued economic unknowns.
