(Kitco News) – China’s central bank added 23 tonnes of gold to its reserves last month, while the country’s gold ETFs saw healthy inflows in September to cap a strong quarter, and the recent holidays and festivals saw demand for gold jewelry, bars and coins rise as prices moderated, according to Ray Jia, research head for China at the World Gold Council (WGC).
In the WGC’s latest China gold market update, Jia noted that while gold’s September price declines cut into Q3 gains, the yellow metal still advanced during the quarter.
“Gold pulled back in September (Chart 1), with the LBMA Gold Price PM in USD and the SHAUPM in RMB falling 8.5% and 5.5%, respectively,” he said. “According to our gold return attribution model (GRAM), soaring US Treasury yields amid the Fed’s tightening moves and the strengthening dollar weighed on gold.”
“The RMB gold price ended Q3 with a 3% gain, trimming its y-t-d loss to 7%,” he noted. “The intensifying US-Iran conflict kept investors’ inflation concerns elevated and raised expectations that more hikes from the Fed are to come – rates were lifted by 25bps in September. Combined with surprisingly resilient US growth, short-term US Treasury yields surged; long-term yields also rose, primarily driven by fiscal concerns via term premia. Amidst these offsetting forces, gold concluded the quarter with a small rise.”
Gold then stabilized in early October, with local gold prices hovering around RMB 900/gram and the international benchmark price holding above $4,100 per ounce. “Geopolitical tensions and their impact on energy prices, as well as investor expectations around inflation and the Fed’s future rate path, remain key to gold’s short-term moves,” he said.
September was not a weak month for ETFs, however, with inflows into Chinese gold ETFs totaling 11 tonnes for their third consecutive monthly increase. “Total holdings reached 304t, a month-end record,” Jia noted. “But Chinese gold ETFs’ total AUM was down 2% to RMB276bn (US$41bn) as the RMB11bn (US$1.6bn) inflow was offset by a lower gold price in the month.”
Chinese gold ETFs saw $3.9 billion in inflows during Q3, raising the quarter’s total AUM by 13% and boosting total holdings by 27 tonnes. “Demand in Q3 has been influenced by rising portfolio diversification needs in the face of plunging local equities,” he said. “Reduced opportunity costs also boosted demand as government bond yields have continued to decline. And further encouragement for gold ETF demand has come from the official sector’s non-stop gold buying announcements.”
“Notably, the positive Q3 offset Q2 losses, setting Chinese gold ETFs’ y-t-d inflows on course for a record year,” Jia noted, while gold ETF demand “carried into early October as local investors continued to diversify portfolios amid sustained equity market weakness.”
Meanwhile, China’s gold futures market cooled along with prices in September. “The average daily trading volume on the SHFE contracted 9% m/m to 360t/day and net longs held by the top 20 market participants – based on available data – fell 5t from end-August, to 149t,” he said. “This moderation in trading activity and net positioning reflected softer market sentiment as both gold prices and volatility eased during the month.”
But despite September’s pullback in activity, net longs still increased 59% in Q3 overall, while volumes also rose 18% during the quarter. “The improving gold price performance after Q2 – particularly in August – has been a major factor driving these changes.”
And wholesale gold demand saw a seasonal pick-up as lower prices boosted retail demand.
“Banks, jewellers and other market participants withdrew 92t of gold from the SGE in September, up 48% m/m,” Jia wrote. “The jewellery sector typically benefits from seasonal replenishment ahead of the National Day Holiday in early October – often viewed as the start of Q4’s peak jewellery sales season - and the gold price pullback has helped. Anecdotal evidence suggests bullion sales also improved as many investors viewed the lower gold price as a better entry point. Plunging local equities presented Chinese investors with limited options and fired their quest for safe assets; this was further bolstered by the PBoC’s non-stop gold purchase announcements.”
“Despite periodic rebounds, notably weaker jewellery consumption than in previous years meant that September SGE withdrawals were subdued from historical norms and 22% lower y/y.”
Third-quarter wholesale gold demand dropped 21% year-over-year to a total of 234 tonnes, and was 44% below the ten-year average of 418 tonnes. “Persistently weak jewellery consumption was the main drag,” he said.
And China’s central bank also took advantage of the lower gold price as it ramped up purchases through Q3 and in September.
“The PBoC reported a 23t gold purchase in September, the largest monthly buying since October 2023,” Jia wrote. “September’s addition brings China’s official gold holdings to 2,410t, 8.5% of total reserves – down 2% in the month to US$3.8tn, due mainly to a pullback in foreign exchange assets.”
He pointed out that September’s purchases extended the PBoC’s monthly gold accumulation streak to 23 months, while pushing the Q3 total to 63 tonnes, the strongest single quarter since Q3 2023. “Y-t-d, the PBoC has accumulated an additional 103t of gold and is one of the most active gold-purchasing central banks globally,” he said.
Looking ahead, Jia wrote that “[t]he long Mid-Autumn Festival weekend at the end of September and the seven-day National Day Holiday in early October – both of which are anticipated sales boosts – saw demand for gold jewellery, bars and coins notably improve as price pullbacks ahead of the holidays encouraged dip buying.”
“The current macro conditions should remain supportive for bullion investment going forward, while the traditional peak season in Q4 should provide a seasonal boost for jewellery consumption, although affordability issues and low consumer confidence may continue to weigh on tonnage demand,” he added.
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