24K99 market analyst Mike Maharrey (Mike Maharrey) quoted the Metals Focus research report as showing that strong demand in China will continue to support the gold market. He said that the decline in gold's pullback in this round did not meet people's expectations. He said that the Central Bank of China's purchases gave investors a strong signal.
Gold recently hit a record high of more than $2,400, but there were some profit settlements and consolidation this week, and the cooling of geopolitical tension in the Middle East curtailed safe-haven buying. Meanwhile, recent tough remarks by Federal Reserve officials have also brought resistance to gold.
Last week, Federal Reserve Chairman Powell acknowledged that the fight against inflation was not progressing smoothly, and hinted that interest rates might stay high for a longer period of time. He said, “We have said we need to have more confidence in inflation before considering lowering interest rates. However, recent data doesn't give us more confidence that inflation is moving towards the 2% target.”
Powell went on to say that it is appropriate for restrictive policies to take more time to work.
Chicago Federal Reserve President Austin Goulsby was even more outspoken, saying, “Progress on inflation has stalled.”
The hawks turned to push the 2-year Treasury yield to 5%.
Despite the drastic adjustment of gold, considering recent market developments, the decline in gold prices did not meet people's expectations. Over the past few months, Western investors would sell gold as soon as there were any signs that the Federal Reserve would maintain higher interest rates for a longer period of time.
Given the central bank's message, a larger adjustment would not be shocking.
However, Mahale stressed that there are other factors supporting the gold market, especially in the East.
The Fed's transformation and recent adjustments may discourage some gold bulls, but analysts and Metals Focus say Asian demand, particularly Chinese purchases, will continue to support gold prices in 2024.
(Source: GoldSeek)
Demand for gold in Asia, and China in particular, has been strong for several months. Wholesale demand in China hit a record high in January, and assets managed by Chinese gold ETFs also reached a record high. China's demand for gold will grow by 28% in 2023, and analysts and Metals Focus predict that demand will continue to be strong for the rest of the year.
Strong gold buying has pushed the gold premium traded on the Shanghai Gold Exchange to a very high level. In the first four months of this year, the average price paid by Chinese buyers was 40 US dollars higher than the London Bullion Market Association benchmark.
Metals Focus analysts note that Chinese investors have historically sold gold when prices rise. This has not been the case for the past few months. Despite rising gold prices and huge premiums, Chinese investors continue to buy large amounts of gold, especially physical gold bars in the form of gold bars and coins.
“Despite the sharp rise in prices putting pressure on jewellery consumption, bullish price expectations actually helped boost demand for bars and coins and limited the scale of profit settlements in Asia and the Asian region.”
The report said that even if we see a further decline in retail gold investment, global bar and coin sales are likely to increase in 2024.
The Metals Focus report notes that in a time of economic uncertainty, Chinese investors face a lack of investment options. As a result, they turned to a tried and tested asset to preserve their wealth: gold.
It is worth noting that in 2023, the sales area and sales volume of commercial housing decreased by 8.5% and 6.5%, respectively. As for the stock market, the Shanghai Composite Index and the Shenzhen Stock Exchange Index were under pressure for most of last year, but the recent rebound seems to have come to a standstill. All of this helps make gold attractive to investors as a safe haven asset and portfolio diversification tool.
Chinese investors seem to be following in the footsteps of the central bank. The People's Bank of China has been buying large amounts of gold for over a year. Since it resumed reporting gold purchases in October 2022, the central bank has been expanding its gold reserves for 16 consecutive months, adding more than 300 tons of gold.
Metals Focus analysts said that the Central Bank of China's buying sent a strong signal to Chinese investors.
“The People's Bank of China's continued diversification of gold is likely to strengthen local investors' confidence in gold and solidify its role as a hedge against market turbulence and financial instability.”