China's Record Gold Demand is Driving the Market This Year

The World Gold Council (WGC) recently published a report indicating that global demand for gold continued to be robust in the first quarter of this year. Mirroring last year’s trends, China remains a major influencer in the gold market reaching new all time highs.

During this period, overall demand for gold rose by 3 percent compared to the same quarter last year, reaching 1,238 tons. However, when considering over-the-counter (OTC) transactions, which occur outside of formal markets, the gold investment demand actually decreased by 5 percent, totalling 1,102 tons.

Last year, the physical demand for gold soared to a record-breaking 4,899 metric tons as seen in the gold market overview. This demand has been seen through a myrid of different factors and through different gold investment options, such as gold ETFs or gold bullion.

Factors such as investments in the OTC market, consistent acquisitions by central banks, and surging demand from Asia contributed to driving gold prices to unprecedented levels. According to the report, the average price of gold per ounce reached $2,070 in the first quarter, marking the highest average quarterly price ever recorded.

“Since March, the price of gold has risen to new records, despite the fact that the United States dollar is strong and interest rates remain high for longer. These have traditionally been pressure factors for gold,”

said Louise Street, senior analyst at WGC.

“There are several different factors behind the recent price increase, which include the growth of geopolitical risks and macroeconomic uncertainty. In addition, demand from central banks is resolute and consistent, there is strong investment demand in the OTC market, and gold is also being bought in the derivatives market. All of this has contributed to the increase in the price of gold,”

Street said.

Massive Purchases by Central Banks and China 🇨🇳

Central banks maintained their strong purchasing of gold, acquiring 290 tons in the quarter

This sustained buying underscores the critical role that gold continues to play in the reserve assets of central banks (such as The Bank of England). It also suggests that central banks in developing countries view the current risk environment as higher than usual. Last year, total gold purchases by central banks exceeded 1,000 tons.

Demand for investment in gold coins and bars rose by 3 percent from the previous year, reaching 312 tons. Additionally, the ongoing decrease in Europe is notably significant, with only 17.9 tonnes of gold purchased in the first quarter.

In comparison, this figure was 38.5 tons in 2022 and 80.8 tons in 2023. The decline in the European market was largely offset by the supply and demand in China, where investors bought 113.5 tons of gold in the first three months of the year, up from 51.8 tons and 68 tons in the preceding two years, respectively.

However, there has been a continued outflow of funds from gold exchange-traded funds (ETFs), with a total of 114 tons of gold being sold, primarily by North American and European funds. Conversely, there has been an inflow into Asian investment products.

Behaviour of Eastern and Western Investors

“What is interesting is that we are seeing changes in behavioural trends between Western and Eastern investors. It has usually been the case that investors in the east are more price sensitive – they wait for a dip to buy. In the West, investors have entered the market just at the time of the price increase. In the first quarter of this year, we saw a reversal of these roles in terms of investment demand. Demand from China and India increased significantly during the price increase,”

explained Street.

“2024 is likely to be a much stronger year for gold than we expected, especially given recent price action. If the price of gold should fall in the coming months, more price-sensitive investors will enter the market again. “Investors continue to seek safe harbour in gold as they await clarity on interest rates and the US election results,”

Street commented.

Global jewellery demand remained robust, even as prices soared to record highs. Compared to last year, demand only decreased by 2 percent. Similar to investment demand, Asia compensated for the decline experienced in Europe and North America in this market segment.

On the supply side, production increased by 4 percent year-on-year, reaching 893 tons—a record for the first quarter. Recycling also reached its highest level since the third quarter of 2020, with a 12 percent increase to 351 tons.