China has its own customs regarding gold, with buying gold during the Lunar New Year holiday being a notable tradition. Historically, the precious metal has traded at a premium to global prices in China around these holidays, which coincide with the peak season for retail demand.
However, this year, Chinese gold buyers are breaking from tradition, influencing the global gold market.
Global gold prices reached another record high this week, with bullion prices in London climbing by over ten percent in the past couple of months and repeatedly setting new records in the last month.
Despite this surge, there has been a significant outflow from gold exchange-traded funds backed by physical gold. The World Gold Council reports net outflows of over 113 tonnes in the first quarter, marking the eighth consecutive quarter of outflows. In April, funds listed in the UK, France, and Germany saw the most significant outflows.
This trend highlights the unique influence of China on the current gold rally. The average daily trading volume of related products on the Shanghai Gold Exchange nearly doubled in April.
The extent of this surge is evident in the premiums. In China, the spot price of gold is approximately $85 higher per troy ounce compared to London's international benchmark. While a premium is typical during the peak season for gold before the Lunar New Year holidays, this time, the premium has persisted for almost a year.
Part of this sustained demand stems from groups that traditionally view gold as a hedge against inflation. Additionally, rising geopolitical risks have made haven assets like gold more appealing. Furthermore, gold is now seen as a hedge against speculation about a potential devaluation of the renminbi, which has weakened about 2 percent against the US dollar this year.
Some Chinese buyers may find reassurance in the central bank's active purchases. China's central bank has been the largest buyer among its global peers over the past year, adding 225 tonnes to its gold reserves last year, the highest amount recorded since at least 1977.
Even at current high prices, Chinese buyer enthusiasm is expected to continue supporting gold prices in the coming months. As global economic and geopolitical uncertainty increases, demand for safe-haven assets like gold is likely to grow.
