(Kitco News) - China has played an unprecedented role in gold’s rally to record highs this year, and while the market may have cooled in the second half of the year, investors should not underestimate the Asian giant’s impact on precious metals.
China’s influence in the gold market will only continue to grow as its economy evolves, according to a panel discussion at the London Bullion Market Association’s 2024 Precious Metals Conference.
“From a consumption perspective, the continued growth of China's economy and its large, growing consumer group will create a solid foundation for China's gold market,” said Dr. Zenghui, Vice President of the Shanghai Gold Exchange (SGE), during the discussion.
Zenghui also noted that gold demand is evolving from basic consumption into an important investment asset within the Chinese economy. He explained that the SGE is in the process of streamlining its membership procedures, making it easier for international companies to tap into China’s gold market.
“I believe there will be more trading strategies and a larger trading market,” Zenghui said. “This is a very exciting opportunity, and I warmly welcome global institutions to join our market.”
Zheng Feng, General Manager of China Platinum Company (CPC), described China’s precious metals market as being at an important crossroads.
“Chinese players are becoming traders rather than net buyers,” he said.
He noted that as gold prices have risen to record highs in the second half of the year, many initial buyers have started to sell into the market.
Zheng added that while the evolution of China’s gold market is positive, it is not without its challenges. He noted that consumer demand faces two major hurdles: weak economic growth and record-high prices cooling the market.
He added that he expects consumers to return to the market when gold becomes more affordable.
Zheng said that CPC, while not massive, has exposure to every part of the precious metals market, from recycling and refining to jewelry and trading services. He added that one of the companies under CPC operates about 2,000 jewelry stores in China.
John Levin, Head of Metal Sales and Trading for Asia-Pacific at TD Securities, joked that when Zheng said his company is small, he is not exaggerating. He explained that it is difficult for Western investors to comprehend just how large the precious metals market is in China. He emphasized that the size of the country’s market is why it remains a major global influence.
“People need to understand the scale and how big it is. There are jewelry stores there that would put some of the biggest U.S. chains to shame in terms of the number of stores and offerings,” he said. “Gold prices are where they are today in part because of the buying power we saw from Chinese consumers in the first half of the year.”
Levin said that one of the biggest reasons Chinese consumers will continue to invest in gold is that, as an investment, it has done exactly what it was expected to do.
“For everyone who bought gold to protect their wealth, it has worked,” he said. “Gold will remain an important asset in China. There is an entrenched belief that buying gold is a good investment.”
As to how the gold market will grow, Zenghui said that the SGE is now looking to expand beyond China’s borders. He explained that they have been working with institutions in Malaysia, Thailand, Singapore, and Hong Kong to make the SGE an international exchange.
By expanding internationally, Zenghui said the SGE can stabilize the nation’s physical demand, leading to less volatility in premiums.
“We're ready to share our development experiences and technology,” he said. “We want to work together to expand the vision of the gold market and create more collaboration opportunities. Our participation in the international market is not to compete, but to cooperate with local players and international counterparties.”
Levin said that the SGE’s focus on expanding internationally should ultimately be a positive step for the gold market. Although it will increase competition among some companies, he noted that the entire marketplace will grow.
While the future looks bright for the Chinese gold market, the panelists also noted that it faces some near-term challenges. In recent months, the People’s Bank of China has been launching new stimulus measures to support the nation’s slowing economy, and some panelists noted that this could prompt Chinese investors to sell their gold and invest in equity markets again. However, any weakness in domestic gold demand is expected to be no more than a short-term correction.
