Chinese Investors Turn To Gold Amid Market Turmoil

Amid market instability, Chinese investors shift to gold, driving demand and keeping prices above $2,000 per ounce.

Why are Chinese investors buying more gold in 2023?

In a shift towards more stable assets, Chinese investors and households are increasingly purchasing gold, driven by uncertainties in the local property, equity, and currency markets. This trend, emerging in the aftermath of the country's exit from Covid-19 lockdowns, has been a key factor supporting gold's elevated prices.

China’s Hang Seng Down Over 50% From Peak
The chart for the Hang Seng could reasonably be mistaken for that of bitcoin.

Record Gold Prices Fueled By Chinese Demand

The World Gold Council (WGC) reports that China was a global standout in gold jewelry and investment flows in 2023. Chinese demand for gold, including bars, coins, and exchange traded funds, surged 28% to 280 tons. This growth largely compensated for a sharp decline in Europe, with Chinese jewelry consumption also rising 10% to 630 tons. Central banks' robust demand further bolstered gold prices, with the metal reaching record highs last month, maintaining levels above $2,000 per troy ounce.

Economic Pressures Steering Investment Choices

The shift towards gold comes as China's CSI 300 equity index fell by over a fifth in the past year, and the value of new home sales among major developers dropped 35% in December year-on-year. BMO analyst Colin Hamilton described the situation as an "ugliness contest" for investment options, with gold becoming a necessary part of Chinese portfolios amid disinflation and income uncertainty. UBS analysts also recognize Chinese demand as a significant yet underappreciated driver of gold prices.

Central Banks And Mystery Buyers Propel Gold Market

Despite a 5% decline in overall gold demand to 4,448 tons in 2023, the inclusion of over-the-counter and stock flows indicates record annual demand at 4,899 tons. Interest rate hikes, which typically diminish gold's appeal, failed to significantly dampen its demand, with central banks led by China, Poland, and Singapore maintaining net purchases above 1,000 tons. Notably, over half of these purchases are attributed to unidentified buyers, underscoring gold's new market dynamics driven by central banks and Chinese household asset allocation.

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