What’s Next for Gold? Look to China for Clues
Gold buying in the country has helped fuel recent surge—and could protect against downturn
Chinese investors are going all-in on gold.
The country’s central bank has pushed its gold reserves to a record level. Consumers in the country are loading up on gold jewelry, in part because they are nervous about the shaky economy. Stock traders are buying the shares of gold miners, and rushing into exchange-traded funds that track the price of the metal.
That has primed the pump for the commodity’s recent rally, and will offer support as the price of gold heads into uncharted territory.
“I don’t think Chinese demand will be enough to propel global gold prices higher. But what it does mean is that any correction should be cushioned by the strong levels of physical demand that we’re seeing there,” said Nikos Kavalis, a managing director of precious-metals consulting firm Metals Focus.
Gold hit an all-time high this week, trading above $2,200 a troy ounce after the Federal Reserve indicated that three interest rate cuts are on the cards for 2024. The price of gold often goes up when interest rates go down, in part because bond returns look less attractive in comparison.
But traders have a record of second-guessing the Fed when economic data comes in hotter than expected, and any doubts about the pace of cuts could weigh on the price of gold in the coming months. The Fed is facing a tricky balancing act that means rate expectations are likely to shift constantly: The economy is booming, but consumers and small businesses are feeling squeezed by higher borrowing costs.
BMI, a research firm, raised its target for the price of gold on Tuesday to between $1,950 and $2,250 a troy ounce, but warned that strong economic data from the U.S. was a major risk factor, since it could slow down rate cuts. The firm said the main drivers of gold this year would be U.S. rates, the performance of the dollar and geopolitics.
State Street Global Advisors, which manages the world’s largest spot-gold ETF, was more bullish: The firm said it expects gold prices to reach between $2,200 and $2,400 once the Fed starts to lower rates later this year.
The People’s Bank of China bought more gold than any global central bank last year, purchasing a net 225 metric tons, according to the World Gold Council, an industry body. That was China’s biggest expansion of gold reserves since 1977. The country’s pension funds, insurers and other state-linked investors are also stocking up on gold, although their purchases are often undeclared, according to market participants.
China imported 367 metric tons of the precious metal for nonmonetary use during the first two months of this year, a 51% increase from the same period last year, according to official data.
Sales of gold and jewelry products in China rose 24% year over year during the Lunar New Year period, typically a boom time for retail spending.
ETFs in China that buy gold and shares of gold miners are booming. Assets under management of gold ETFs in the country hit a record high in January at $4 billion, according to the China Gold Association. On March 15, shares of Zijin Mining, one of China’s largest miners of gold and minerals, closed at an all-time high.
Chinese demand is being fueled by gold’s reputation as a safe haven. A prolonged real estate crisis, a tepid stock market and a shaky economy have pushed Chinese investors to find alternative places to put their money. On Friday, the offshore yuan hit its weakest level against the dollar this year.
“China’s real-estate sector has difficulties. The equity market is volatile. The currency is weak. All of these things are encouraging Chinese investors to diversify into gold,” said John Reade, chief market strategist at the World Gold Council.