China’s Consumers Show Growing Influence in Gold Market

BEIJING—China’s increasing appetite for bling is giving some spark to the moribund gold market.
Gold prices are up 4% in the past week, hitting a three-week high of $1,334.70 an ounce on Monday. A big factor behind the rise is a surge in demand for physical gold in China, some investors and analysts say.Demand in China, where consumers account for roughly a quarter of global gold demand, hit a record 385.5 metric tons in the second quarter, according data released Monday by the state-backed China Gold Association. That is double the figure from a year earlier, according to a Wall Street Journal analysis of the data.Closely watched estimates from the World Gold Council are slated for release on Thursday. Data released in May from the mining trade group showed Chinese consumers bought 294.3 metric tons of gold in the first quarter, a 20% rise on the year.
Buyers in China tend to be budget conscious, and they have pounced on gold jewelry amid this year’s decline in prices. Before the past week’s bounce, gold prices were down 23% year to date. Chinese purchases have helped keep gold prices stable since a sharp selloff in April, when prices fell by more than $200 in two consecutive trading sessions, analysts say.”Without strong Chinese physical demand, gold prices would likely be trading at a much lower price now,” says Joyce Liu, an analyst with Chicago brokerage Phillip Futures.More buying in China likely would act as a catalyst for gold prices, taken together with other drivers, says Axel Merk, chief investment officer at Merk Investments LLC, which has $600 million under management.
Demand in India, which some observers expect to lose its spot as the world’s biggest gold consumer to China this year, also is rising. There are signs of renewed bullishness elsewhere, as well. The amount of gold held by SPDR Gold Trust, the largest exchange-traded fund that buys and stores the metal on behalf of investors, rose by 1.8 metric tons on Friday, the first increase in two months.Relatively cheap gold has retained its allure in China, especially when compared with other investment options, such as a stock market that remains well below highs of five years ago. “Gold is culturally accepted as a place to put your money in,” says Mr. Merk, who increased his fund’s gold holdings in recent months.Zhu Di, 45 years old, is one of many gold buyers who have thronged the country’s jewelry stores. Watching gold’s decline in the April-June period, Ms. Zhu decided it was an good time to buy. “I’ve always paid attention to gold prices,” she said recently as she shopped in a store off Beijing’s eastern Dongzhimen hub.
China’s rising purchases could help it win sought-after price-setting power in the gold markets, an initiative it has pursued by widening trading hours and giving commercial banks greater ability to trade. China is the world’s largest gold producer but local prices usually take their cue from U.S. and European markets.To be sure, some buyers in China are waiting for gold prices to fall further, below the 266-yuan a gram quoted on the Shanghai Gold Exchange Monday, before stepping in.Still on the sidelines is Xie Xiaoying, who was shopping for a gift of gold to commemorate her brother’s newborn’s first month, a traditional Chinese rite of passage. But she held back on a purchase, anticipating lower prices. “If the price is 220 or 250 yuan, more gold buyers would come out,” she said.Buying in China already has started to slow from the frantic pace seen in the second quarter, says Suki Cooper, an analyst with Barclays. “It’s questionable if we’ll get the same sort of [purchasing] volume through the rest of the year,” Ms. Cooper says. “And on a day-to-day basis, gold seems much more focused on economic data and Fed speeches” than Asian demand.
Analysts attribute gold’s sharp selloff this year to a high likelihood that the Federal Reserve will scale back stimulus measures in the coming months. Gold bulls had bet that the Fed’s stimulus would lead to rapid inflation and attract investors looking for a hedge against rising prices. Inflation readings have remained tepid, however, undermining the case for gold.Still, Chinese gold demand is a force to be reckoned with, analysts say. And middle-aged women are a key segment of retail demand, says Jiao Guangyi, deputy general manager of the All Love All Life gold store in Beijing.”Older consumers, women, definitely took up a larger proportion of consumers in the gold rush,” Mr. Jiao said. “They hadn’t seen such prices in a long time so it was a big draw.”

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