According to a recent research report by Metals Focus, strong Chinese demand for gold is anticipated to continue bolstering the gold market despite recent fluctuations and profit-taking.
Gold prices reached record highs exceeding $2,400 before experiencing some consolidation and profit-taking this week, partly attributed to easing geopolitical tensions in the Middle East and hawkish comments from Federal Reserve officials. This sentiment shift caused a notable 2.7 percent decline in gold prices on Monday, marking the sharpest single-day drop in nearly two years.
Federal Reserve Chairman Jerome Powell acknowledged challenges in combating inflation, hinting at prolonged higher interest rates. Powell emphasized the need for more confidence in inflation before considering rate reductions, stating that it is appropriate to allow restrictive policies more time to take effect.
The hawkish stance contributed to a rise in the 2-year Treasury yield to 5 percent. Despite these developments, gold experienced a significant correction that was less severe than expected, thanks in part to strong demand from Asian markets, particularly China.
Chinese gold demand remains robust despite rising prices, with wholesale demand setting a record in January and assets under management in Chinese gold-backed ETFs reaching all-time highs. Analysts project continued solid demand throughout 2024 following a 28 percent increase in Chinese gold demand in 2023.
Metals Focus notes that Chinese investors historically sell gold into rising prices but have not done so in recent months. Instead, they continue to accumulate physical bullion in the form of bars and coins, driven by bullish price expectations and limited alternative investment options amidst economic uncertainty.
The report highlights that Chinese investors, mirroring their central bank’s behavior, view gold as a reliable hedge against market volatility and financial instability. The People’s Bank of China (PBoC) has been consistently increasing its gold reserves for over a year, adding more than 300 tons since resuming reporting in October 2022.
This trend suggests that the PBoC’s diversification into gold is reinforcing local investors’ confidence in the metal’s role as a safe haven and portfolio diversifier. The ongoing preference for gold among Chinese investors underscores the metal’s enduring appeal amid economic challenges and uncertainty surrounding traditional investment avenues like real estate and equities.
As global economic conditions evolve and geopolitical tensions fluctuate, the resilience of Chinese gold demand is expected to play a significant role in supporting the stability of the gold market throughout 2024.
