This gold rally is made in China
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
China has its own traditions when it comes to gold. Buying gold during the Lunar New Year holiday is one of them. That is why the precious metal has historically traded at a premium to global prices in China near those holidays early in the year, the peak season for retail demand.
This year, Chinese gold buyers are breaking with tradition and changing the rules of the game for the rest of the world.
Global gold prices hit another record high on Monday. Bullion prices in London are up more than a tenth in the past couple of months and have repeatedly broken fresh records over the past month.
That may come as a surprise: outflows from gold exchange traded funds backed by physical gold only keep climbing. Net outflows have exceeded 113 tonnes in the first quarter, according to the World Gold Council, marking the eighth straight quarter of outflows. In April, funds listed in the UK, France and Germany led the outflows.
That only serves to show that this historic gold rally is made in China. The average daily trading volume of related products on the Shanghai Gold Exchange almost doubled in April.
The extent of this frenzy can be seen in the premiums. In China, the spot price of gold is about $85 more per troy ounce compared to London’s international benchmark. A premium is not unusual during the peak season for gold before the lunar new year holidays.
This time around, the premium has persisted for nearly a year. Part of that demand comes from groups that have traditionally regarded gold as a hedge against inflation. Rising geopolitical risks make haven assets such as gold more attractive. But now gold is also being seen as a hedge against rising speculation about a potential devaluation of renminbi. The renminbi has weakened about 2 per cent against the US dollar this year.
Some Chinese buyers are likely to have taken reassurance from the central bank’s active purchases. China’s central bank has been the largest buyer among global peers over the past year. Its addition of 225 tonnes to its gold reserves last year was the highest on record since at least 1977.
Even at today’s pricey levels Chinese buyer enthusiasm is enough support for gold prices in the coming months. As global economic and geopolitical uncertainty grows so should demand for havens.
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