China sharply increased its gold imports this year as prices swung wildly amid the fallout from the war involving Iran and other global uncertainties. [EPA]
China sharply increased its gold imports this year as prices swung wildly amid the fallout from the war involving Iran and other global uncertainties. [EPA]

As gold prices have swung sharply this year, expectations are growing that China's massive demand may be providing a floor for the market.

According to the Financial Times, China spent $158.8 billion importing more than 1,000 tons of gold in the eight months from January through last month — the largest amount ever spent on gold imports. By comparison, China imported 886 tons of gold for all of last year, spending $96.5 billion.

China had curbed gold purchases when prices surged sharply, but this year the People's Bank of China and private investors have resumed buying as they seek to diversify their assets.

China is also the world's largest gold producer, having mined 3.84 million tons last year. Despite that, demand for gold has risen sharply this year. Lisa Liu, an executive director at Gold Mountains Asset Management, an affiliate of Zijin Mining Group, China's largest gold producer, said both central banks and private investors "are diversifying reserves and savings toward counterparty-risk-free assets as part of a broader long-term wealth preservation strategy." Liu added that "this is not short-term trading but a multi-year reallocation of household and public sector assets," and that "China's scale and persistence of buying has now become a key driver of international gold prices, and we expect this trend to continue as long as uncertainty around growth and geopolitics persists."

Investor demand is driving China's gold-buying trend. Since China's real estate market began to collapse in 2021, investment options have become severely limited. At the same time, anxiety has spread through bond markets — with US government bond yields climbing to their highest level in 19 years — while supply chain disruptions from the war involving Iran and persistent inflation concerns have pushed investors to seek stable, diversified holdings.

The central bank is also eyeing the gold market as part of a strategy to diversify its portfolio into safe assets. According to Goldman Sachs, the People's Bank of China has been buying more gold than it officially discloses. A Goldman Sachs report released earlier this month estimated that the central bank purchased 35 tons of gold in July — compared with the 20 tons Chinese authorities announced, suggesting actual purchases were significantly higher.

As gold has risen in prominence, US government bonds — long considered a safe haven — are losing ground. According to the Financial Times, China's holdings of US Treasuries fell to $618 billion in July, the lowest level since August 2008.

Another notable feature of the current market is the absence of the historical pattern in which gold prices fell during periods of rising interest rates. Christopher Hamilton, head of Asia-Pacific client solutions at Invesco, noted that while rising real interest rates once pushed gold prices down, that relationship has broken down. "We are in an environment where people want to hold real assets," he said. Hamilton added that institutional investor buying remains the single most important factor driving gold prices.


kate01@heraldcorp.com