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Can Lunar New Year revive Chinese gold demand after CGA reports nearly 11% drop in 2022

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Welcome to Kitco News' 2023 Outlook Series. Uncertainty continues to dominate financial markets as central bank monetary policies push the global economy into a recession to cool down inflation. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2023.

(Kitco News) - Chinese consumers are getting ready to celebrate the Lunar New Year; however, the auspicious holiday, an important one for the global gold market, is coming after disappointing Chinese demand for the precious metal in 2022.

Thursday, the China Gold Association (CGA) reported that gold consumption totaled 1,001.74 tonnes last year, a drop of 10.63%. The decline in bullion demand was led by weak bar and coin demand, which fell 17.23% last year.

At the same time, the CGA said that jewelry demand fell 8% to 654.32 tonnes.

"Consumption for gold jewelry experienced a strong recovery in the beginning of last year, but then slid notably because of covid flare-ups in the country," it said.

According to analysts, Chinese gold purchases were dampened last year because of market disruptions caused by the COVID-19 pandemic, even as the nation started to ease restrictions and the high price of gold in yuan terms.

Ray Jia, senior Chinese market analyst at the World Gold Council, said in a report published at the start of the week that gold price rallied 10% against the yuan last year.

"Geopolitical uncertainties, inflationary concerns and a weak local currency all contributed to this sizable rise," he said.

Along with weak consumer demand, Jia noted that the wholesale gold market in China was also weak in 2022, suffering from the same factors that weigh on consumer purchases.

Jia noted that gold manufacturers withdrew 1,571 tonnes of gold from the Shanghai Gold Exchange, the weakest outflows in the past ten years.

"The COVID pandemic has undoubtedly impacted China"s economic recovery and local gold demand. During the majority of H1, severe COVID-related lockdowns in major cities limited China"s economic activities and hammered local gold demand. Wholesale gold demand started to recover in June as the spread of COVID stabilized but hopes were dashed as local infections surged in Q4," he said.

The WGC said that it is expecting Lunar New Year celebrations to jumpstart demand again.

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"China"s economic recovery and gold consumption should benefit from the end of the strict zero-COVID policy and policy makers" prioritisation of consumption stimulation," Jia said in his analysis. "Although challenges such as future COVID infection waves may exist, we expect a rebound in China"s gold demand in 2023, the Year of the Rabbit."

As to how the Lunar New Year celebrations will impact gold, Nicky Shiels, head of metals strategy at MKS PAMP, said that with Chinese markets closing next week, gold could see a correction soon.

She also noted that rising premiums in the Chinese gold market mean that the precious metal is the most expensive it has ever been ahead of the holidays.

"That adds to the bearish anxiousness growing in the gold marketplace as prices remain both technically overbought in the short-term and just simply a little overcooked," she said. "The traditional thinking is metals remain bid in the lead up to CNY creating seasonally strong buying tailwinds and then come under pressure after as consumers remain sidelined."

However, even if gold prices recede further from their recent nine-month highs, Shiels said that wouldn"t change the broader long-term uptrend.

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