Chinese gold buyers forced to sidelines as prices near $3,000

Gold’s scorching rally to near $3,000 an ounce threatens to leave buyers in China behind.

Bullion’s ascent over the past year has counted Chinese demand among its key drivers. But record prices, a weak economy, and the extra costs imposed by a strong dollar, are making purchases too expensive for many consumers in the world’s biggest buyer.

International gold prices have been super-charged by the Trump presidency, as investors seek a haven from the possible fallout from the new administration’s more confrontational foreign policy. That includes the prospect of a trade war with Beijing, which has lifted the dollar and made gold even dearer in China.

“There’s an affordability issue,” said Philip Klapwijk, managing director of Hong Kong-based consultant Precious Metals Insights Ltd. “And then there’s just the general economic malaise, and the fact that consumers are not in a position to open their purses or wallets in the way they used to.”

It suggests the worldwide dash for bullion could have seen prices rise even further had Chinese buyers been out in force. Instead, the increase in demand that typically materializes ahead of the Lunar New Year gifting season was fainter than usual, offering some respite to a red-hot market, Klapwijk said.

Chinese demand metrics have been flickering for a while, although some bright spots persist. Investment in bars and coins has held up, given volatility in stock markets and the ongoing crisis in the housing sector. But the bigger portion of demand claimed by jewelry sales has sunk as the economy has slowed.

“Domestic savers may favor the simplicity and relative transparency of gold,” said Nicholas Frappell, global head of institutional markets at ABC Refinery in Sydney. “But I am not expecting anything spectacular given household constraints.”

Wholesalers, meanwhile, are drawing less then usual from exchange stockpiles. “People are cutting expenses,” said Fenny Zeng, founder of Royer Jewelry in Shenzhen. “More and more are preferring smaller jewelry with better designs.”

As a major importer, gold buyers in China often have to pay over the odds to secure bullion. But the so-called Shanghai premium actually flipped to a discount for most of the last six months, indicating weak appetite for physical gold as prices have surged. Paper investments are another matter, however, with exchange-traded funds backed by the precious metal rising to record levels.

And there’s another big buyer that continues to underpin sentiment, irrespective — or perhaps because of — weakness in the yuan. After a six-month pause, the People’s Bank of China resumed its bullion purchases in November as it seeks to diversify its reserves, adding more in January, according to the latest data on Friday.

Goldman Sachs Group Inc. detects support for the yuan at play in the timing of the PBOC’s purchases.

“The central bank may want to send a signal to the market of confidence in the currency,” said Daan Struyven, Goldman’s co-head of global commodities research. It wants to show “the currency is backed by rising and elevated gold holdings.”

(By Yihui Xie and Sybilla Gross)