Gold on a roll

Gold prices have surged recently, driven by record-breaking sales and a combination of global economic factors, with China playing a central role in this historic rally.

This is according to Citadel’s latest weekly market wrap, which explained that lower interest rates are not the only reason for rising gold prices.

“Gold’s recent rally has captivated the financial world, with prices soaring to unprecedented highs; gold prices have seen an impressive 31% increase over the past year,” Citadel said. 

This rise isn’t just due to gold’s usual appeal as a safe investment during times of low interest rates. Instead, a combination of factors, particularly China’s strong demand, has played a key role.

Citadel explained how, historically, gold has always been seen as a refuge during times of economic uncertainty, particularly when interest rates are low.

With central banks adopting more accommodative monetary policies, the cost of holding non-yielding assets like gold decreases, making it more attractive to investors. 

“This dynamic has been a significant driver of gold prices,” Citadel explained. “However, this year’s rally tells a more complex story, with China at its centre.”

According to World Gold Council senior analyst Ray Jia, the Shanghai Gold Benchmark PM (SHAUPM) reached record highs in July, reflecting China’s strong influence on global gold pricing.

Citadel explained that China has a long-standing cultural affinity for gold, with demand often peaking during the Lunar New Year. 

But 2024 has seen unprecedented levels of buying, including from the People’s Bank of China (PBoC), which has acquired 225 tonnes of gold – the largest annual increase in its history. 

This aggressive purchasing aligns with China’s broader strategy of reducing reliance on the US dollar and diversifying its reserves.

“The PBoC’s purchases have not only provided a solid floor for gold prices but have also sent a strong signal to the market, reinforcing the metal’s role as a critical asset in times of economic and geopolitical uncertainty,” Jia said.

“This consistent demand has profoundly impacted global prices, pushing them higher, even as traditional Western investors have shown less enthusiasm.”

Chinese speculators have also played a significant role, with long futures contracts on the Shanghai Futures Exchange (SHFE) increasing by almost 50% since late last year. 

“This speculative frenzy has not only bolstered Chinese prices but has also exerted considerable influence on the global market, challenging the traditional dominance held by Western traders,” Jia said.

China’s gold buying also acts as a hedge against the yuan’s devaluation. 

“Moreover, the country’s economic uncertainty and geopolitical tensions with the US and other conflicts, like its fight with Taiwan, have amplified gold’s appeal,” Jia explained.

With the US Federal Reserve signalling potential interest rate cuts, Treasury yields are expected to drop, making gold an increasingly attractive option for investors, according to Citadel. 

This anticipation led to a 4% rise in the LBMA Gold Price PM in USD in July. As bond yields decline, the opportunity cost of holding non-yielding assets like gold decreases, broadening its appeal across the investment spectrum.

“Western interest in gold-backed ETFs, which had waned in recent years, is also showing signs of a revival, further supporting prices,” the asset manager said.

Jia explained that despite weak wholesale demand, Chinese gold ETFs have seen sustained inflows for eight consecutive months, reaching record levels in both assets under management (AUM) and collective holdings. 

This shows a growing interest in gold as a financial asset, even when physical demand might be lagging.

The global economic outlook remains uncertain, with ongoing geopolitical tensions, especially in the Middle East and Asia, fueling demand for safe-haven assets like gold, Citadel added.  

In this context, China’s influence on the gold market is expected to remain strong. The PBoC’s brief pause in gold purchases earlier this year was temporary, as new quotas for bullion flow were issued in August, signalling ongoing strong demand.

“While declining interest rates have certainly provided a favourable backdrop for gold, it is China that is the real engine behind the metal’s historic rally,” Citadel explained. 

“The country’s massive and sustained purchases, both by the central bank and private speculators, have pushed prices to new heights but, perhaps more importantly, have also shifted the balance of power in the global gold market.” 

“As long as economic and geopolitical uncertainties persist and China continues to diversify away from the US dollar, the gold rally is unlikely to lose momentum anytime soon.”