The Rise and Fall of China’s Gold Premium
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The Mean Reversion of the Premium

As the first quarter of 2024 continued, the market soon started to show a slowdown in demand as jewelry consumption was impacted, likely by weak consumer confidence and rising gold prices. By the end of the second quarter of 2024, the price of gold at the Shanghai Gold Exchange was trading at around 550 Chinese Yuan per gram, about 15% higher compared to the price at the height of the Shanghai gold premium in September 2023.

Gold Prices

According to data from industry group the World Gold Council (WGC), China’s consumer gold demand in the first three months of 2024 reached 309 tons, the strongest Q1 since 2014. It softened in Q2 to a total of 174.4 tons, registering a 9% year-on-year decrease. 

A similar pattern can be observed in the monthly gold withdrawals from the Shanghai Gold Exchange (SGE). Meeting the demand for the Chinese New Year, January 2024 saw the largest ever load-out of 271 tons. Withdrawals, however, flattened and continued shrinking in the following months, with May, June and July figures all below 90 tons. The diminishing withdrawals coincide with the slowdown in local gold demand and are reflected in the lower Shanghai gold premium. By August, the premium had further retreated, fluctuating to around the historical mean of $6 per troy ounce.

SGE Gold

Could Gold’s Rally Continue?

It seems global gold markets are finding price support amid lower interest rates, continued geopolitical risks and potential central-bank purchases. A survey of central banks by the WGC in June 2024 shows that 81% of the respondents expect the gold holdings of global central banks to continue growing in the next 12 months. On the other hand, profit-taking, market corrections and competition from other investment vehicles, such as the equity market, could mitigate the rally in gold prices. 

If gold prices do stay strong, whether Chinese consumers manage to adapt to the high-price environment and resume purchases could be a factor dictating the premium price. Performance of China’s economy, which has been slowing, and volatility in the Yuan exchange rate could potentially play important roles as well.    

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