(Kitco News) – China’s central bank refrained from adding to their gold reserves for the fourth consecutive month in August, according to official data released on Saturday.
China's gold holdings held steady at 72.8 million troy ounces at the end of last month, the same level as the prior month. The value of the country’s gold reserves rose to $182.98 billion compared with $176.64 billion at the end of July, however, as gold prices broke above $2,500 per ounce last month. Gold prices have gained over 21% this year.
The People's Bank of China (PBOC) broke its 18-month streak of net gold purchases in May, sending shockwaves through the gold market and causing a sharp selloff when traders realized that one of the yellow metal’s steadiest supports was now on hold.
“What it says to me is they're not just going to keep paying up forever and ever,” Colin Cieszynski, Chief Market Strategist at SIA Wealth Management, told Kitco News at the time. “They've got a limit of how much they're willing to pay, and we've probably gotten to it.”
“Does it mean they're done, or did they have to take a break for any number of reasons? And if so, for how long? That's a big unknown,” he added.
While the PBoC has refrained from additional purchases recently, analysts at Capital Economics said the pause in gold accumulation is only temporary as “China’s gold rush has much further to run” amid a backdrop of rising global tensions, economic uncertainty, and ongoing efforts to move away from the U.S. dollar.
“Against the backdrop of central bank buying, strong physical gold demand, and a surge in ETF holdings, China appears to have been a key driver of the rally in gold prices earlier this year,” they said. “Looking ahead, we think that China’s appetite for gold will grow as its economy slows down this decade. This will put upward pressure on gold prices and could be a greater source of volatility in gold markets over the coming years.”
While Capital Economics sees a higher level of demand in the decade ahead, in the near term, they said the PBoC may continue to pause further purchases until gold price retreats from record highs.
“A combination of cyclical factors point towards gold demand in China weakening in the near term,” they warned. “Higher prices are already weighing heavily on jewelry demand, fiscal stimulus should provide a much-needed lift to the economy, and we expect stock market performance to pick up given that local equities seem lowly valued to us.”
“Bringing all this together, the attractiveness of gold relative to other assets will probably fall, and ‘safe-haven’ demand for gold in China is likely to ease,” they said.
However, the pause will only be temporary as the country is expected to see a notable deterioration in its economy, largely driven by losses in the real estate market.
“Further ahead, though, we expect China’s demand for gold to strengthen and put significant upward pressure on prices over the rest of the decade,” the analysts said. “This is largely because we think fiscal stimulus will only delay, rather than prevent, the impending property-led economic slowdown. This will weigh on the performance of investment alternatives to gold, thus boosting the metal’s appeal as a safe store of value.”
Spot gold last traded at 2,497.35 per ounce on Monday, virtually flat on the session and less than $3 below the $2,500 threshold.
