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China has its own traditions when it comes to gold. Buying gold during the Lunar New Year holidays is one of them. That's why the precious metal has historically traded at a premium to global prices in China around the early-year holidays, the peak season for retail demand.
This year, Chinese gold buyers are breaking with tradition and changing the rules of the game for the rest of the world.
Global gold prices hit another all-time high on Monday. Bullion prices in London have risen by more than a tenth in recent months and have repeatedly broken new records over the past month.
This may come as a surprise: outflows from gold exchange-traded funds backed by physical gold continue to rise. Net departures exceeded 113 tonnes in the first quarter, according to the World Gold Council, marking the eighth consecutive quarter of departures. In April, funds listed in the United Kingdom, France and Germany led the outflows.
This just goes to show that this historic gold rally is happening in China. The average daily trading volume of related products on the Shanghai Gold Exchange nearly doubled in April.
The extent of this frenzy can be seen in the premiums. In China, the spot price of gold is approximately $85 higher per troy ounce compared to the international London reference price. A premium is not unusual during the peak gold season before the lunar new year holiday.
This time, the bonus persists for almost a year. Some of that demand comes from groups that have traditionally viewed gold as a hedge against inflation. Rising geopolitical risks make safe-haven assets like gold more attractive. But gold is now also seen as a hedge against growing speculation about a possible devaluation of the renminbi. The renminbi has weakened about 2 percent against the US dollar this year.
Some Chinese buyers may have taken comfort from the central bank's active buying. China's central bank has been the biggest buyer among its global peers over the past year. Its addition of 225 tonnes to its gold reserves last year was the largest on record since at least 1977.
Even at current price levels, the enthusiasm of Chinese buyers is enough support for gold prices in the coming months. As global economic and geopolitical uncertainty grows, so should demand for shelters.
june.yoon@ft.com
