(Kitco News) - The gold market has been holding significant gains since the start of the year, but the momentum behind the bullish drive has dried up as investors once again focus on the Federal Reserve’s monetary policy.
The gold market has been consolidating around $2,350 an ounce for the last three weeks as the Federal Reserve signals a reluctance to start a new easing cycle with inflation stubbornly elevated.
However, one bank analyst said that U.S. monetary policy is becoming a secondary factor as Asian markets evolve from price-taking to price-setting.
In his latest commentary on the gold market, Bernard Dahdah, precious metals analyst at Natixis, said that Asian markets have seen a significant evolution since 2008.
Dahdah said that in 2001, the Chinese gold market became deregulated; however, it wasn’t until the Great Financial Crisis and concerns over U.S. debt that the central bank and Chinese consumers started looking at gold as an attractive asset.
Dahdah added that 2013 was an important year for Chinese gold demand.
“That year, China cemented itself as the market of last resort: whilst prices tumbled by 29% in the first six months of the year (on the back of a Western investor selloff of physically backed gold), Chinese consumers opportunistically bought a record 1,400 tonnes of the metal, setting a floor at $1,200/oz,” he said.
Since then, China’s influence has only grown. Other important milestones include 2014, when The Shanghai Gold Exchange International opened up for global investors, becoming the country’s international benchmark.
In 2016, the SGE started pricing gold in renminbi and competing with New York and London as a price setter. Dahdah said the SGE has now become the largest physical spot exchange in the world.
“We would argue that the Chinese gold market is now capable of not just being a market of last resort that purchases opportunistically at price dips but is now also capable of imposing broader price discovery on the entire market. We believe this was the case during this April’s price rally,” Dahdah said.
China’s growing influence in the global gold market isn’t surprising, as Dahdah noted the nation’s insatiable appetite for the precious metal. He explained that China is the world’s largest gold producer, accounting for more than 10% of global production.
Despite this production, he pointed out that the nation imported 1,480 tonnes of gold last year, a five-year high.
Looking at prices, Dahdah noted that at the start of April, gold premiums on the SHGEI reached a high of $85 above prices set in London.
“This is despite record high prices of gold, which to us suggests that Chinese consumer demand contributed largely to that rally,” he said. “Since the start of the year Chinese premiums have average $43/oz which is considered elevated in historic terms.”
Although China’s gold consumption has improved significantly in the last decade, Dahdah said he expects the People’s Bank of China to continue buying gold for the foreseeable future.
“Over the past 15 years, total gold holdings have risen from 600 to 2,235 tonnes (averaging 109 tonnes a year). This has increased the share of gold in total CB reserves from under 1% to 4.3%,” he said. “Although we do not pretend to know the Chinese central bank’s ultimate target of the share of gold in total reserves, typically a share of at least 10% is reckoned to have a meaningful impact on reserves.”
As to the impact this will have on prices, Dadah said that he expects gold prices to hit $2,600 an ounce by 2025 and average around $2,255 an ounce this year and $2,445 an ounce next year.
Dahdah added that he finds it hard to believe that gold can rally to $3,000 an ounce as speculative positioning is still relatively close to the highs seen in 2020.
