Chinese physical gold demand slid across the board in May, but ETFs remained strong

NEW YORK (June 14) Chinese physical gold demand was weaker across the board in May amid high local prices, but local ETFs continued their recent string of inflows, according to Ray Jia, China Research Head at the World Gold Council.

“Gold extended its strength in May albeit with a narrower increase than in recent months,” Jia wrote in the latest WGC China update. “Both the LBMA Gold Price AM in USD and the SHAUPM in RMB rose by 1% last month.”

Jia said that U.S. dollar weakness, lower bond yields, and rising demand from gold ETFs contributed to gold’s price strength during the month, but early June saw the LBMA Gold Price AM fall by 2% while the SHAUPM in RMB saw a further 1% rise due to a weakening yuan. 

“During the first five months of 2024, gold in RMB has surged by more than 15%, outperforming all major assets in China,” he noted. “Robust demand, geopolitical risk spikes, RMB weakness, and the prospect of a global easing cycle ahead, were the main drivers of gold’s strength.”

Physical demand for the yellow metal cooled significantly last month, posting its weakest May in four years.

“Gold withdrawals from the SGE amounted to 82t in May, 49t lower m/m and 30t lower y/y,” Jia said. “[T]he elevated gold price dimmed consumer interest in gold jewellery, leading to weaker-than-expected sales during the five-day International Labour Day Holiday in early May – a traditional demand boost – and this trend continued for the rest of the month.”

He added that the moderation in gold prices also discouraged physical bar and coin investors to the sidelines.

“Consequently, wholesale gold demand experienced its weakest May since 2020 – when demand was affected by the COVID pandemic – ending the month 34% below the 10-year average,” Jia said. “Nonetheless, due to demand strength earlier this year, gold withdrawals have totalled 736t so far in 2024, 35t higher y/y.”

Jia said that activity in China’s gold futures market also pulled back considerably in May. “Following the surge in April, trading volumes of Shanghai Futures Exchange’s active gold future contract cooled – averaging 193t per day in May, a 44% m/m fall,” he wrote. “However, volumes remain well above the five-year average of 163t.”

The premium local buyers paid over global spot prices also fell last month. “On average, the Chinese gold price premium fell to US$32/oz in May, US$10/oz lower m/m,” Jia said. The m/m drop was mainly driven by weakening wholesale demand.”

But despite all the other price and demand indicators sliding, the country’s gold ETFs still saw continued inflows in May.

“Chinese gold ETFs added RMB1.8bn (US$253mn) in May, the sixth consecutive monthly inflow,” Jia noted. “May pushed the total AUM to RMB48bn (US$6.7bn), another record high, and collective holdings increased by 3t to 87t, also the highest ever.”

Jia said that declining equities, yuan weakness, and a slide in Chinese government bond yields combined to push investors into gold.

“Interestingly, we noticed accelerating inflows towards the end of the month when the gold price corrected, showing signs of ‘dip buying’, which had been the main pattern prior to 2020,” he said. “Chinese funds have attracted RMB14bn (US$2bn) y-t-d, pushing total AUM and holdings 41% and 65% higher, respectively.”

Of course, the big news from last Friday was the announcement that the gold reserves of the People’s Bank of China (PBoC) remained unchanged in May, bringing its 18-month buying streak to an end.

“The PBoC’s gold reserves stood at 2,264t at the end of May; the first month in which there has been no announcement of gold buying since November 2022,” Jia wrote. “Gold now accounts for 4.93% of China’s total official reserves, the highest ever thanks to May’s gold price strength. The PBOC stated gold reserve increase remains at 29t y-t-d, representing a 1.3% rise in holdings during the same period.”

Imports were also marginally lower in April, the WGC noted, with consumers electing to remain on the sidelines as local gold prices hovered close to record highs.

“Gold imports into China totalled 77t in April, 8t lower m/m and a 24t fall y/y,” Jia said. “We believe this was mainly a result of weaker gold jewellery demand during the month.”

“Nonetheless, imports held up relatively well during past months when the gold price surged – investment demand strength has partially cancelled out gold jewellery consumption slowdown,” he said.

Looking ahead, Jia said that high prices “may continue to suppress gold jewellery consumption and further divert consumers to lighter and cheaper products,” and added that they “don’t expect wholesale demand to pick up until mid-to-late Q3, when manufacturers and retailers replenish for the National Day Holiday sales boost.”

Regarding the pullback in bar and coin sales he said the WGC believes that “heightened geopolitical risks, as well as the fact that gold has been a strong-performing non-RMB and global asset, should continue to attract investors” but in the near term, “investment demand for gold may be negatively impacted by the recent price correction – which may push undecided investors to the sidelines.”