China’s economy is not in a great place and its currency is in trouble. The uproar is causing the prices of gold, considered a safe haven, to skyrocket.
Spot gold prices recently hit record highs — above $2,400 per ounce — thanks to global demand linked to economic and geopolitical uncertainties. Expectations of lower interest rates from central banks also boost gold’s appeal, as yields on fixed-income assets like bonds typically fall as rates fall.
In China, consumers face an economy struggling to recover from the pandemic and a weak yuan that has fallen about 5% against the U.S. dollar over the past year. This makes gold – which, like most internationally traded commodities, is denominated in US dollars on the global market – even more expensive for the Chinese consumer. But consumers and China’s central bank can’t get enough gold.
Even Gen Z investors in China are getting in on the trend by buying tiny bottles of “golden beans,” Bloomberg reported last month. They are looking for alternatives to Chinese stock markets, which have been struggling in recent years.
China’s central bank has also been buying gold, in quantities far greater than Gen Z’s few grams of beans.
The People’s Bank of China, or PBOC, has been buying gold for 17 consecutive months, with its holdings of the precious metal having increased by 16% during this period, according to a report by the international trade association World Gold Council. This buying frenzy coincides with a trend by central banks around the world to diversify their holdings to reduce their dependence on the U.S. dollar.
In 2023, China’s central bank purchased 225 tonnes of gold, according to the World Gold Council. Last month, China’s gold reserves increased by 5 tonnes, bringing the country’s total reserve to 2,262 tonnes.
China has overtaken India as the world’s largest gold buyer
Since China is now home to swarms of gold prospectors, the country has decidedly overtaken India as the world’s largest buyer of this raw material. The two economies have vied for top spots for years, but China’s buying spree last year left India lagging behind.
Last year, Chinese demand for gold jewelry rose 10%, to 630 tonnes purchased, while India’s purchases fell 6%, to 562 tonnes, according to the World Gold Council. American consumers are in third place, purchasing only 136 tons of gold jewelry in 2023.
It’s not just China. Data from the World Gold Council shows that other central banks, including Poland and Singapore also bought gold to hedge against global economic uncertainties.
The Indian central bank bought 16.2 tonnes of gold last year. The United States did not add gold to its reserves. However, the United States already has the largest gold reserves in the world, with approximately 8,134 tons of the precious metal, far more than second-place Germany, which holds 3,352 tons of the raw material.
Despite the gold rush, Georgette Boele, economist at the Dutch bank ABN AMRO, warned against going all-in on this commodity in a context of record prices in a note dated April 15.
“The development of gold prices is positive and it seems that there are no limits. However, we remain cautious,” writes Boele.
She highlighted an apparent paradox in the market: High U.S. interest rates would typically keep gold prices low, but the opposite is happening.
“Even though these changes have occurred in the past, they tend to be temporary in nature, meaning they can last approximately three to six months,” Boele wrote.
High gold prices do not mean there is a supply crisis, she wrote.
“The amount of central bank purchases does not justify gold prices at current levels,” she wrote. Based on this assessment, it said it was maintaining its forecast of $2,000 per ounce of gold at the end of 2024, below the current rate of around $2,400.
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