China's Dominance in the Gold Market: Fueling Prices Amid Global Uncertainty

Gold's ascent to unprecedented levels above $2,400 per ounce in 2024 has garnered significant global attention, with China playing a central role in this upward trajectory. As the world’s largest producer and consumer of gold, China's influence on the market remains substantial, especially as geopolitical tensions worsen, including conflicts in the Middle East and Ukraine. The possibility of lower US interest rates has further reinforced gold's appeal as a safe investment, with Chinese demand, from retail shoppers to central banks, being a key driver in the ongoing rally.

In recent years, China has surpassed India as the world’s largest consumer of gold, particularly in jewellery, bars, and coins. While India’s demand for jewellery declined by 6%, China’s surged by 10%, and bar and coin investments increased by 28%. This shift in consumption patterns has been bolstered by limited domestic investment options in China, coupled with ongoing economic challenges, such as the property crisis, stock market volatility, and a weakening yuan, driving a flight towards safer assets like gold.

Despite being the world's leading gold producer, China continues to rely heavily on imports, with overseas purchases surpassing 2,800 tonnes over the past two years. This is equivalent to a third of the US Federal Reserve’s stockpile or more than the metal backing exchange-traded funds (ETFs) worldwide. Gold imports into China have increased notably, particularly ahead of the Lunar New Year celebrations, with the first quarter of 2024 showing a 34% rise compared to the previous year.

China's central bank has maintained a prolonged buying spree, continuing for 17 months, as it seeks to diversify its reserves away from the US dollar and hedge against potential currency depreciation. This trend reflects a broader move by central banks globally, with gold purchases remaining near record levels.

Chinese demand for gold remains strong despite record-high prices and a weakening yuan, which has eroded purchasing power. The premium that Chinese buyers pay over international prices has risen significantly, indicating sustained interest. While elevated prices may dampen some enthusiasm, China's continued demand is providing a solid foundation for the gold market. Even state interventions aimed at curbing excessive speculation have done little to diminish the allure of gold in China. 

Exchange-traded funds (ETFs) in China have seen consistent inflows since mid-2023, in contrast to outflows from funds in other parts of the world. With restricted domestic investment options, Chinese investors are increasingly turning to gold ETFs as a more stable alternative.