How demand from China is underpinning gold’s continued ascent
14 November 2024
For months, analysts have been speculating whether the price of gold can keep rising. So far, the answer has been ‘yes’.
But what are the forces underpinning this steady rise – and will they continue? From the start of 2024 until November, gold was up 34%, to about USD2,700 per troy ounce. And according to Goldman Sachs Commodities Strategist Lina Thomas, it will reach USD3,000 by the end of 2025.[1]
Expectations of continued interest rate cuts will doubtless play an important part in this dynamic. Traditionally, lower rates have boded well for gold. Because the precious metal does not offer a yield, it can become less attractive when interest rates are higher, sending investors to interest-bearing assets like bonds.
But interest rates are just one of the many determinants of the price of gold. After all, although the inverse relationship between gold prices and interest rates seemed to hold from 1990 to 2016 (see Figure 1), between 2016 and 2019 gold prices kept rising even though interest rates also climbed consistently.[2] Since then, gold has continued to appreciate even as central banks slashed interest rates during the Covid-19 era and then embarked on a tightening cycle to rein in inflation.[3]
Figure 1: Interest rates and gold prices, 1990-2023[4]
So, while gold price movements cannot be explained by interest rates movements alone, the start of an easing cycle is clearly a tailwind.
Then there is the current environment of heightened geopolitical tensions and global macroeconomic uncertainty, a combination that tends to stoke demand for haven assets like gold. The long wait for the US presidential election is now over, but ongoing hot wars in Europe and the Middle East, along with the threat of intensifying trade wars pitting China against the US and the European Union, will keep investors on edge for the foreseeable future.
Central banks underpin demand
However, there is another major long-term driver of demand for gold that could potentially play an even bigger role in sustaining its upward trajectory: purchases by the People’s Bank of China (PBoC) to replace the US Treasuries that currently make up about a third of its reserves,[5] against a backdrop of escalating trade tensions between the two nations.
Policymakers may also increasingly want to lessen their exposure to fiscal risks in the US, where borrowing stands at about USD35 trillion, equivalent to about 124% of GDP.[6]
Central banks and sovereign wealth funds in Russia and the Middle East are also following this trend. Aware of these dynamics, US funds, family offices and asset managers have also reportedly increased gold’s allocation within their portfolios to 10-15% from 5-7%.[7]
China has been the primary driver of the price of gold in the last two years, according to Bloomberg, having purchased more than 2,800 tons from abroad during the period, more than the amount underpinning exchange-traded funds (ETFs).[8]
Gold now accounts for nearly 5% of China’s total reserves, but that still pales in comparison to the near 70% share held by the US Federal Reserve (see Figure 2) and other Western countries, suggesting much further room for the PBoC’s gold purchases to run.[9]
Figure 2: Gold as a percentage of central bank reserves
Chinese retail investors have also amassed gold over the past two years to counter headwinds in other assets, such as property and equities.[10] Although the high price is putting a short-term crimp on demand from Chinese retail investors and jewelry buyers,[11] that could prove transitory if prices look set to stay high.
There are good reasons still to be wary: gold’s sharp rise could mean that it is poised for a sharp correction. But analysts point out that there are plenty of buyers waiting in the wings to buy dips and sustain the upward trajectory.[12]
Even though the pace of central bank gold purchases has moderated recently, that slowdown could prove temporary. In any case, it is likely to be offset by gold holdings in Western exchange-traded funds gradually increasing as interest rates fall, according to Goldman Sachs Research.[13] For this reason, most other major brokerages predict gold’s record-breaking price rally will extend into 2025.[14]
Longer term, gold’s fortunes will depend on how quickly countries will choose to replace US Treasuries in their reserves, which, in turn, will depend heavily on the evolving geopolitical landscape and how much further the US economy slows.[15]
The US dollar’s share of global foreign exchange reserves has dropped by about 10 percentage points since the turn of the century.[16] That process could accelerate as viable alternatives emerge. Central banks have been replacing dollars with not only currencies of very large economies such as China and the European Union, but, increasingly, also currencies from smaller economies with strong credit ratings, like Australia, Canada and South Korea.[17]
Shelter in the storm
Throughout history, people have sought out gold as a way to preserve wealth in times of upheaval and strife. That function could well see it continue to test new highs as the world continues to grapple with geopolitical and macroeconomic uncertainty.
In such an environment, securities-backed financing from EquitiesFirst shows its worth, allowing investors to generate stable capital without having to sacrifice the upside potential of their underlying holdings. They can thereby follow their convictions in managing volatility while seeking to preserve and grow their wealth.
[1] https://www.goldmansachs.com/insights/articles/gold-predicted-to-climb-higher-than-expected-as-records-shatter
[2] https://www.herobullion.com/gold-prices-and-interest-rates/
[3] https://www.herobullion.com/gold-prices-and-interest-rates/
[4] https://www.herobullion.com/gold-prices-and-interest-rates/
[5] https://thetricontinental.org/wenhua-zongheng-2024-1-china-foreign-exchange-reserves/#:~:text=Of%20China’s%20%249%20trillion%20in,bills%20account%20for%2032%20percent
[6] https://www.goldmansachs.com/insights/articles/gold-predicted-to-climb-higher-than-expected-as-records-shatter
[7] https://www.ft.com/content/69d46a93-916c-4044-a3c4-f1b5bad2e412
[8] https://www.bloomberg.com/news/articles/2024-04-21/china-is-front-and-center-of-gold-s-record-breaking-rally
[9] https://internationalbanker.com/banking/whats-behind-chinas-gold-buying-spree/#:~:text=The%20last%20two%20years%20have,Federal%20Reserve%20(the%20Fed)
[10] https://www.ft.com/content/69d46a93-916c-4044-a3c4-f1b5bad2e412
[11] https://investingnews.com/gold-jewelry-demand-china/
[12] https://www.reuters.com/business/finance/most-banks-expect-golds-bull-run-persist-into-2025-2024-09-24/
[13] https://www.goldmansachs.com/insights/articles/gold-predicted-to-climb-higher-than-expected-as-records-shatter
[14] https://www.reuters.com/business/finance/most-banks-expect-golds-bull-run-persist-into-2025-2024-09-24/
[15] https://www.bloomberg.com/news/articles/2024-11-01/us-economy-slowing-but-solid-near-election-unemployment-low
[16] https://www.gbm.hsbc.com/en-gb/insights/market-and-regulatory-insights/the-future-of-reserve-currencies-in-a-multipolar-world#:~:text=Instead%20of%20replacing%20US%20dollars,and%20the%20South%20Korean%20won
[17] https://data.imf.org/regular.aspx?key=41175
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