Why China Is The World’s Largest Gold Consumer

At a Glance

  • China’s appetite for gold continues as use in jewelry, electric cars and central bank reserves increase  
  • Retail investors in China purchased 10.7 million ounces of gold bars and coins in 2018

Gold has long enjoyed deep cultural significance in China, which holds the title for being both the world’s largest gold consumer and its largest producer. Demand for the yellow metal in China looks like it will continue to rise, driven by a combination of increasing levels of wealth, global economic uncertainty and changing central bank policy.

Momentum Drivers

We typically see four key drivers for gold demand in any market: jewelry purchases, industrial use, central bank purchases and retail investment. China’s market is no exception.

Jewelry Sales: Gold plays a strong role in traditional celebrations in China, and is typically gifted at weddings and births, while ornamental gold sales also spike around the Lunar New Year and during Golden Week in October. At a time when gold jewelry sales are static or falling in many markets, they rose by 3 percent in China in 2018 to reach a three-year high of 23.7 million ounces accounting for 30 percent of the world’s total, according to the World Gold Council (WGC). The rising wealth of China’s growing middle class is expected to continue to support this trend going forward.

Industrials: China also continues to be a significant purchaser of gold for industrial use, particularly for high-end consumer electronics, electric cars, LEDs and printed circuit boards. That said, the U.S.-China trade tensions have contributed to slowing demand in this area as some industrial production has been shifted out of China. The LED sector has been particularly hard hit, with tariffs imposed on more than 30 lighting applications. WGC figures show the consumption of gold for industrial purposes fell by 9.6 percent year-on-year in China during the fourth quarter of 2018.

Central Bank Purchases: As industrial demand for gold is falling, purchases by China’s central bank are rising, with the People’s Bank of China (PBoC) increasing its gold reserves in December 2018 for the first time since October 2016. It purchased 351,000 ounces of the yellow metal during December, followed by a further 1.16 million ounces during the first quarter of 2019, according to the WGC. The PBoC held just 2.4 percent of its $3.1 trillion forex reserves in gold at the end of 2018. Some speculate it may look to increase its reserves to more closely resemble levels held by other central banks. For example, the U.S. Federal Reserve holds 74 percent of its reserves in gold, while Germany’s Bundesbank holds 70 percent. If the PBoC continues to buy gold at this rate, it could become the world’s largest central bank gold purchaser in 2019.

Retail Investors: Another major source of gold demand in China comes from investors. WGC figures show retail investors purchased 10.7 million ounces of gold bars and coins in 2018 on the back of the slowing economy, weakening Renminbi (RMB), stock market volatility and the ongoing U.S.-China trade tensions. As global economic uncertainty persists, this trend looks set to continue in 2019.

A Safe Haven Asset

Alongside these drivers, gold continues to play an important role as a safe haven investment in a changing economic environment. The gold price hit a four-week high of $1,319.55/oz in late March, driven by concerns of a global economic slowdown, as the U.S. economy showed signs of faltering.

Economic uncertainty due to a number of factors including Brexit, the U.S.-China trade tensions and slowing global growth, is also leading to equity market volatility. Gold traditionally has a low and sometimes negative correlation to other asset classes, increasing its appeal in the current climate. The metal is also attractive as a currency hedge. The RMB has lost one third of its value against gold since June 2007. If the strength of the U.S. dollar declines based on lower interest rate expectations, the RMB will follow it lower due to its currency peg, further increasing the appeal of gold.

Gold Futures

Another option for investors who want exposure to gold is to invest in gold futures. Gold futures offer the same advantages of physical gold in terms of portfolio diversification, without investors having to take delivery of the metal or bear the cost of storing it. They also enable investors to hedge against future price volatility, as the gold price can be very responsive to political and economic events.

The gold futures market is typically more liquid than the physical gold market. For example, a total of 9.28 billion notional ounces of COMEX Gold futures and options were traded in 2018, 12 percent more than in 2017, with the equivalent of nearly 37 million ounces being traded every day.

There is also flexibility in the contract sizes for investors trading gold futures, starting at just 10 ounces, all the way to 100 ounces enabling investors to tailor the contracts to their risk management programs.  At CME Group, with our Gold futures and options volume accounting for more than one-third of the global total volume traded during the Asian trading hours (Beijing 8 a.m. to 8 p.m.), investors can also be assured of the deep liquidity on their contracts when it comes to managing risks during their trading day.

Sachin Patel is a Senior Director of Metals Products for CME Group. He is based in Singapore.

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