Gold Prices Surge as Chinese Retail Investors Drive Demand

Gold prices have reached unprecedented highs, fueled by an unexpected surge in demand from retail investors in China who seek to safeguard their assets amidst economic uncertainty.

According to Tsutomu Kosuge, president of Tokyo-based commodity research firm Marketedge, the surge in gold prices is primarily driven by physical demand from China, marking a departure from the typical speculative-driven rallies. Gold futures on the New York market are currently trading between $2,300 and $2,350 per troy ounce for the most actively traded contracts, representing a more than 10% increase from the end of February when prices closed at $2,054.70.

The rally in gold prices has been relentless, with futures hitting record highs for eight consecutive trading sessions in early April, reaching $2,448.80 at one point. This surge comes amid net outflows of more than 113 tonnes from exchange-traded funds backed by physical gold in the first quarter, a trend that has persisted for eight consecutive quarters.

Traditionally, gold ETFs attract speculative funds from Western institutional investors. However, rising long-term interest rates in the U.S. have prompted institutional investors to withdraw funds from gold, despite the absence of interest-bearing returns.

The identity of the mystery buyers driving the surge in gold prices was partially revealed through data from the Shanghai Gold Exchange. The average daily trading volume of gold products surged by 78.8% year-on-year during the March-April period, reaching 613.4 tonnes. China’s gold bar and coin demand rose by 68% year-on-year in the first quarter to 110.5 tonnes, driven by retail investors and dealers stocking up on gold to sell on the SGE.

Market analysts attribute the increased demand for gold in China to concerns over currency depreciation amid a real estate slump and restrictions on crypto assets and dollar-denominated assets. The People’s Bank of China has been steadily increasing its gold holdings for 18 consecutive months, providing reassurance to retail investors.

Despite the spot price of gold in China surpassing London’s international benchmark since June, Chinese retail investors continue to purchase gold, viewing it as a safe haven asset. Takahiro Morita, CEO of commodity market intelligence firm Morita & Associates, believes that this trend of gold purchases among Chinese retail investors may evolve into a long-term trend as they seek to safeguard their assets.