Commodities
Analysis – China’s gold buying break seen as fleeting given its long-term needs
By Polina Devitt and Kevin Yao
LONDON/BEIJING (Reuters) – China still has plenty of appetite for official gold purchases despite pausing in May and June, as its bullion holdings remain low as a share of reserves and geopolitical tensions persist, according to a policy insider, industry experts and data.
Beijing’s gold buying, which helped the spot price rally in April and May, is no longer perceived to be immune to price sensitivity, but ongoing geopolitical risks are expected to keep its longer-term programme to diversify exposure from U.S. dollar-denominated assets active.
China’s gold reserves need to rise in absolute and relative terms because they do not match the status of the world’s second-largest economy and gold’s share of its reserves is the lowest of any major economy, said a Chinese policy insider involved in internal discussions who declined to be named due to the sensitivity of the matter.
“But we need to look at prices – it’s impossible for the central bank to maintain a constant amount of purchases each month,” the insider said, adding that geopolitical factors spurred by the Russia-Ukraine war and the Middle East conflict were among drivers of China’s gold demand in recent years.
Officials at the central bank, the People’s Bank of China (PBOC), have never publicly commented on what prompted a resumption in gold buying in November 2022 after a more-than three-year pause.
Eight months after Western sanctions froze $300 billion of Russia’s official reserves, about half of Moscow’s total, the PBOC started reporting gold purchases and kept doing so for 18 months, forming a pillar for global gold prices to hit record highs in 2024.
The PBOC was the world’s largest single buyer of gold in 2023, with its net purchases of 7.23 million ounces the most by China for at least 46 years, according to the World Gold Council.
But when it made no purchases in May and June this year, spot prices came under pressure, leaving the market guessing about China’s future appetite.
The policy insider attributed the pause in buying to “high prices”. The spot price, which regained ground after a dip in June, hit a record high during trading on Wednesday on improved U.S. rate cut hopes.
The PBOC and foreign exchange regulator State Administration of Foreign Exchange did not respond to Reuters’ requests for comment.
China has the world’s largest foreign currency reserves, at $3.22 trillion in June. But gold’s share of China’s overall reserves, which include its reserve position and special drawing rights (SDRs) at the International Monetary Fund, while at a record high of 4.9% is low compared to the global average of 16%.
Developing and emerging market countries typically have a much lower share of gold in reserves than advanced economies, which have smaller currency reserves.
“Given that base and very large scale of FX reserves we believe the PBOC will be buying gold at higher volumes for decades,” said Nitesh Shah, commodity strategist at WisdomTree.
Demand from investors in China is also set to stay strong, he said, amid a prolonged property crisis and as central bank purchases give confidence in gold as a store of value.
“The official sector buying is a free advertisement for gold in China,” said Shaokai Fan, global head of the central banks sector at the World Gold Council. “In the sense that if the central bank is buying gold, maybe I, as a retail investor, shall buy some too.”
RUSSIAN PRECEDENT AND SECRECY
Putting more reserves in gold is a matter of security because bullion can be stored onshore – safe from seizure.
Officially, Russia’s gold is 30% of its $597 billion reserves, but in terms of accessible assets the share is much bigger as half of Russia’s reserves were frozen by Western countries in reaction to Moscow’s invasion of Ukraine in 2022.
That precedent, in which Russia’s central bank kept access only to investments in yuan-denominated assets and gold, has served as a cautionary tale for China, which has an estimated 60% of its reserves in U.S. dollar-denominated assets, according to analysts.
“The main motivation of the PBOC is to be less dependent on the U.S. dollar and – in an extreme case – to be less susceptible to U.S. sanctions,” said Carsten Menke, analyst at Julius Baer.
He expects China’s desire to diversify reserves to persist as “the geopolitical tensions between China and the United States are unlikely to disappear anytime soon, independent of the outcome of the U.S. presidential elections.”
It took China nine years to raise the share of gold in its total reserves to 4.9% from 1.8% in 2015.
China holds 72.8 million ounces of gold worth about $170 billion. If it eventually lifted the share of gold in its reserves even to 10% at current reserve levels and prices, the purchases would total another $170 billion.
For comparison, Russia’s central bank stopped active buying of the precious metal in 2020 when gold reached 20% of its total reserves. Gold’s share has since grown due in part to its rising price.
The PBOC has sometimes reported past gold purchases well after they occurred, according to the World Gold Council, leading analysts to caution the latest statistics may not provide the full picture.
Investing.com– Gold prices hit a record high in Asian trade on Monday amid growing bets that the Federal Reserve will cut interest rates by a bigger margin later this week.
Reports of a second assassination attempt on Republican presidential nominee Donald Trump also spurred some demand for safe havens, although Trump appeared to be unharmed, and the assailant apprehended.
Asian trading volumes were somewhat limited by market holidays in Japan, China, and South Korea.
rose 0.4% to a record high of $2,589.02 an ounce, while expiring in December rose 0.1% to $2,613.70 an ounce.
Gold benefits from rate cut bets as Fed looms
A softer allowed for more strength in gold prices, as markets awaited a Fed meeting.
The central bank is widely expected to on Wednesday, although markets are split between a 25 or 50 basis point cut.
showed markets split exactly 50% over the two options, with bets on a bigger cut coming back into play on concerns over weakness in the labor market.
The central bank is also expected to kick off an easing cycle from this week, with analysts expecting at least 100 bps of rate cuts by the end of the year.
Lower rates bode well for precious metals, given that they reduce the opportunity cost of investing in non-yielding assets.
rose 0.4% to $1,004.80 an ounce, while rose 0.8% to $31.332 an ounce.
Trump assassination attempt spurs some safe haven demand
Gold saw some safe haven demand after reports of a second assassination attempt on Trump, this time at his golf course in Florida.
But secret service agents foiled the attempt in a reported shootout with the assailant, who was later apprehended by authorities. Trump was unharmed during the event, stating as much in a message on his fundraising website.
Copper prices steady after weak Chinese data
Among industrial metals, copper prices benefited from a softer dollar. But gains in the red metal were held back by a string of weak economic readings from China, the world’s biggest copper importer.
Benchmark on the London Metal Exchange rose 0.1% to $9,276.0 a ton, while one-month rose 0.1% to $4.2225 a pound.
A string of data released from China over the weekend showed and grew less than expected in August, while rose and fell.
The readings ramped up concerns over an economic slowdown in the country, which could bode poorly for its appetite for copper. But ANZ analysts said that the government could now have more impetus to release stimulus measures.
By Robert Harvey
LONDON (Reuters) -Oil prices edged higher on Monday as ongoing disruption to U.S. Gulf oil infrastructure balanced persistent demand concerns after a fresh round of Chinese data while investors await a likely cut to U.S. interest rates this week.
futures for November were up 46 cents, or 0.64%, at $72.07 a barrel by 1207 GMT. futures for October rose 52 cents, or 0.76%, to $69.17.
The market is likely to remain cautious until the Federal Reserve makes its interest rate decision on Wednesday, said Phillip Nova analyst Priyanka Sachdeva, adding that prices are still supported by some supply worries given that some capacity remains offline in the Gulf of Mexico.
Traders are increasingly betting on rate cut of 50 basis points (bps) rather than 25 bps, as shown by the CME FedWatch tool that tracks fed fund futures.
Lower interest rates typically reduce the cost of borrowing, which can boost economic activity and lift demand for oil.
However, a cut of 50 bps could also signal weakness in the U.S. economy, which could raise concerns over oil demand, said OANDA analyst Kelvin Wong.
Saxo Bank analyst Ole Hansen, meanwhile, said activity is likely to remain light ahead of the Fed meeting, adding that the outcome “looks like a coin toss between 25 and 50 bps”.
Nearly a fifth of crude oil production and 28% of output in the Gulf of Mexico remains offline in the aftermath of Hurricane Francine.
Weaker Chinese economic data released over the weekend dampened market sentiment, with the low-for-longer growth outlook in the world’s second-largest economy reinforcing doubts over oil demand, IG market strategist Yeap Jun Rong said in an email.
Industrial output growth in China, the world’s top oil importer, slowed to a five-month low in August while retail sales and new home prices weakened further.
Oil refinery output also fell for a fifth month as weak fuel demand and export margins curbed production.
Brent and WTI each gained about 1% last week but remain comfortably below their August averages of $78.88 and $75.43 a barrel respectively after a price slide around the start of this month driven in part by demand concerns.
Investing.com — Oil prices rose Monday, benefiting from ongoing disruption to U.S. Gulf oil production as well as a softer dollar ahead of an expected interest rate cut by the Federal Reserve later this week.
At 08:05 ET (12:05 GMT), rose 0.7% to $72.11 a barrel, while rose 0.8% to $68.30 a barrel.
Rate cuts in focus as Fed meeting looms
A softer was the biggest point of support for oil prices, as markets positioned for an from the Fed on Wednesday.
The central bank is likely to kick off an easing cycle, although traders are split over a 25 or 50 basis point cut.
Still, lower rates bode well for economic growth, which in turn could help keep U.S. fuel demand supported in the coming months.
Continued disruption in Gulf of Mexico
Also helping the tone was the continued disruption of production in the Gulf of Mexico following the arrival of Hurricane Francine.
Nearly a fifth of crude oil production and 28% of natural gas output in U.S. Gulf of Mexico federal waters remains offline, the U.S. offshore energy regulator said on Sunday.
Francine hit Louisiana as a Category 2 hurricane on Wednesday, eventually cutting power in four southern states.
Chinese economic data underwhelms
But gains were capped by persistent concerns over slowing demand, especially following a slew of weaker-than-expected economic data from China over the weekend.
and both missed expectations, while rose and fell.
The readings ramped up concerns that slowing economic growth in the world’s biggest oil importer will dent its appetite for crude.
Analysts at ANZ said Beijing was likely to roll out more stimulus measures to help support local economic growth, although they still expect gross domestic product to come below the government’s 5% target in the third quarter.
Concerns over China saw both the Organization of Petroleum Exporting Countries and the International Energy Agency slash their outlook for oil demand growth in the current year.
Holidays in China and Japan also kept trading volumes relatively slim.
(Ambar Warrick contribute to this article.)
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