China, as the biggest official sector buyer of gold, has been steadily increasing its gold reserves over the past 18 months. However, official data from the People’s Bank of China (PBOC) in May showed that their holdings remained unchanged. This news caused a sharp drop in global spot prices, but industry players believe that China is simply waiting for prices to ease before resuming its gold shopping spree. According to David Tait, CEO of the World Gold Council (WGC), if prices correct to around $2,200 per ounce, China is likely to start buying gold again.
The announcement of China’s unchanged gold reserves in May led to a significant drop in spot gold prices, which had hit a record high of $2,449.89 per ounce in May. This drop was the largest daily decline in 3-1/2 years, but experts believe that the fundamental case for gold remains strong. Interest rate cut expectations, firm central bank buying, and geopolitical tensions have all contributed to the surge in gold prices. China’s central bank controls the amount of gold coming into the country through quotas to commercial banks, and in 2023, China was the largest official sector buyer of gold.
Despite the temporary pause in China’s gold buying, industry experts are optimistic about future purchases. Central banks around the world, including China, are expected to increase their exposure to gold in the next 12-24 months. KL Yap, chairman of the Singapore Bullion Market Association, stated that China is the main buyer of gold and is likely to continue purchasing more in the future. Gold has always been considered a safe haven asset in times of economic and geopolitical uncertainty, making it an attractive investment choice for many investors.
Market Response and Speculation
Following China’s minimal gold purchases in April and unchanged reserves in May, there has been speculation about the country’s future buying patterns. Some analysts believe that the lack of purchases does not indicate a long-term shift in China’s stance on gold. In April, the Shanghai Gold Exchange increased margin requirements for certain gold futures contracts as prices reached historical highs. This move indicates that authorities are closely monitoring the gold market and taking steps to prevent speculative trading.
While China’s temporary pause in gold purchases may have caused a short-term dip in prices, the long-term outlook for gold remains positive. With central banks and investors increasingly turning to gold as a hedge against economic and geopolitical risks, it is likely that China will resume its gold shopping spree once prices ease. The fundamental case for gold as a safe haven asset is expected to drive future purchases, making the metal an attractive investment option in uncertain times.