Gold Rates

China's Gold Rates

Discover the latest updates on China’s Gold Rates. Stay informed about the fluctuating prices and market trends of gold. The local premium then jumped in August (as Chinese households’ household gold buying recovered from Covid lockdowns). This is when Shanghai-London futures spread short covering helped to boost the premium.

As a result of this and other factors, China’s gold market now trades at a record-high relative premium over New York or London prices.

Price Changes

As a volatile asset, gold prices can react quickly to changing economic and political conditions. This makes it an excellent proxy for investor sentiment and the risk of financial instability. In addition, the size of private and official gold holdings is relatively large compared to current production. This means that small shifts in expectations about future changes in stocks can engender large price movements.

As such, gold is often viewed as a safe haven in times of uncertainty and turmoil. The surge in China’s premium reflects this view. The premium has risen to more than $100 over international prices, the highest in more than a decade.

This is mainly due to the growing sensitivity of Chinese investors toward global instability and economic uncertainty. This has led to a strong investment demand for gold as an alternative to equities. However, there is also a sense of caution among Chinese investors about the stability of the country’s economy and currency. As a result, they are avoiding equities and investing in gold instead.

One way to understand these trends is to examine the relationship between the prices of international gold and the prices of gold stocks in Shanghai and Shenzhen. According to Granger causality test, the price change of international gold market has a direct impact on the price of Shanghai and Shenzhen gold stocks. However, the impact is not as great as one might expect.

China’s sagging yuan and its effort to prop up its ailing economy, outflows of capital, rising deflation, and weakening sentiment can all lead to increased demand for gold as an alternative to equities. In addition, China’s hedging activities could add to this demand.

The fact that Chinese household gold demand has remained robust even in the face of slowing GDP growth is another sign of this increased demand. If the Communist Party abandons its ill-judged zero Covid policy, this will likely be another boon for gold. This will be a particularly important factor during the Lunar New Year holiday, when Chinese families typically give and invest in gold alongside cash gifts.

Percentage Changes

With global demand for physical gold returning to pre-Covid levels and Chinese household purchases of the metal re-accelerating, a structural change is underway. The decade-long negative correlation between real yields and gold is fading, softening the metal’s pricing power in a faceoff against Western debt issuance. This is a positive development for gold investors, as higher real interest rates should boost global economic growth and reduce the need for risk-averse consumers to seek out alternatives like gold.

Nevertheless, the weaker dollar and weak local stock and property markets are encouraging consumers to re-patronise gold. In fact, Chinese consumers (according to the China Gold Association) are now buying almost twice as much gold in a year as the People’s Bank has reported.

The central bank is also a huge buyer of gold, and its official purchases may be significantly larger than officially reported. The World Gold Council estimates that China bought 129 tonnes more in the third quarter than it reported, taking total official sector buying to 337 tonnes.

Meanwhile, the renminbi is at a record low against the US dollar and a host of other currencies. The tumbling Chinese currency is helping to make US-listed gold more affordable for Asian investors. This should help to boost investment demand for the metal, which is a traditional store of value in Asia.

Despite the low level of Chinese consumer spending, the country’s households save a large proportion of their income. This, combined with a weak yuan, vapid local stock market and troubled property sector, has encouraged many to buy gold to preserve their wealth.

In the long term, Chinese households’ demand for gold is likely to be capped by its high price volatility. However, the re-opening of the economy and deep cultural appetite for physical gold could provide some support in the short term. Moreover, a rush to foreign markets by emerging economies to avoid the pitfalls of the US dollar should also strengthen the hand of the yellow metal. This could be a key driver for higher prices next year. In addition, a low level of inflation globally should also support gold prices, although there is a risk that it will be less attractive than other asset classes when inflation does pick up.

Time-Series Analysis

The gold market has been transformed since China liberalised its domestic bullion trading in 2002. It is now the world’s biggest producer and consumer, which has had a major impact on the structure of the global bullion market in terms of key players, refining centres and vaulting locations. It has also significantly influenced global bullion demand and prices. Chinese demand is especially significant because, based on China Gold Association figures, China’s private households have accumulated more than 2,000 tonnes of gold in the last two-and-a-half years alone – far more than the gold that the PBoC has added to its national reserves in the same period.

As such, it is important to understand how the price of gold in China influences the global markets and how China’s domestic market is related to international markets. This can be done using time-series analysis, in which the price of a commodity is plotted against time to identify trends.

To do this, we analysed the daily gold prices of the Shanghai Gold Exchange (SGE) and the Comex gold futures traded in New York. We used a daily moving average for the SGE and a monthly moving average for the Comex. We then plotted the prices of the two commodities against each other to see if there were any trends.

We found that there were some significant day-of-the-month effects, as well as month-of-the-year effects in both cases. However, we found that the month-of-the-year effects were more important in the SGE data than in the Comex data.

This was because the SGE data only includes gold bought with renminbi, while the Comex data covers both renminbi and US dollars. As such, the SGE data is more sensitive to changes in renminbi-denominated pricing, which means that its price movements have greater effect on the international gold market. This would be expected given that the PBoC’s current strategy is to diversify its foreign exchange holdings by buying gold in both US and renminbi-denominated terms. This is an important reason why the SGE’s premium – which is an indication of a supply-demand imbalance in the domestic market – is so much higher than the international gold price.

Forecasting

Gold is one of the most popular financial assets worldwide. This precious metal is a safe haven asset against inflation and currency depreciation. Moreover, it has a long history of being used as jewellery and investment. However, the price of gold has fluctuated over time due to several reasons. Nevertheless, analysts forecast that gold will continue rising in 2025. This will be mainly driven by the growing demand for this asset. Furthermore, the rise in geopolitical tensions will further push the demand for gold.

In addition, emerging market central banks are increasing their holdings of the precious metal to gain more independence from the US dollar. This is in response to the shifting global economic outlook, which has increased the risk of inflation. This has led to a weakening of the decade-long correlation between real yield levels and gold. In our view, this reflects a stronger structural demand for gold and softens the historical influence of real yields on the price of the commodity.

China’s household gold demand has been strong throughout the pandemic, even as GDP growth sagged. In fact, Chinese households saved 0.33% of GDP in dollar terms, which is hugely larger than the 0.06% of GDP spent on gold by consumers in the US or Germany. This is a reflection of the lower level of income that Chinese households take home, coupled with weak social security safety nets for retirement and health.

As the Covid-19 pandemic recedes, gold demand is likely to return to normal levels. However, it may take some time for this to happen. This will be a good time to buy gold, as it will be cheaper than during the peak of the pandemic. Furthermore, the rising inflationary environment in developing countries will boost demand for gold as a hedge against inflation. This will further drive the XAUUSD rate higher.