Why is China turning its back to gold jewellery? Chris Wood explains

Gold price today India, China: China, one of Asia’s biggest consumer of gold besides India, seems to be turning its back to the yellow metal, suggests Christopher Wood, global head of equity strategy at Jefferies. 

A near-term negative, Wood wrote in his weekly note to investors, GREED & fear, has been evidence of weakening Chinese demand as reflected in gold recently moving to a discount in Shanghai for the first time since June 2023, which has dropped from a $63/ounce (oz) premium to international prices in mid-June to a $12/oz discount last week. This was the biggest discount since early May 2023, though it rose again to a $13/oz premium thereafter, data showed.

 

Another bottom-up evidence of weakening demand in China, Wood said, also came with the release of quarterly data by Hong Kong-quoted Chow Tai Fook on Tuesday, a retailer of gold and jewellery. It reported a 20 per cent YoY decline in retail sales value in Q1-FY25 ended June 2024, with same store sales (SSS) declining by 26 per cent YoY in Mainland China, and by 31 per cent YoY in Hong Kong/Macau.

“The latest data shows weakening Chinese consumer demand for gold. According to the National Bureau of Statistics, retail sales value of gold, silver and jewellery at enterprises above a designated size declined by 3.7 per cent YoY in June following 11 per cent YoY decline in May. It was up only 0.2 per cent YoY to Rmb172.5 billion in H1-CY24, compared with a 13.3 per cent YoY increase in 2013. China gold imports plunged 58 per cent MoM and 40 per cent YoY to 58.9 tonnes in June, the lowest level since May 2022. Such data presumably reflects Chinese consumers' resistance to rising gold prices in renminbi terms,” Wood wrote.

Meanwhile, in the January – March 2024 quarter (Q1-CY24), gold demand for jewellery in Mainland China dropped 6 per cent YoY to 184.2 tonnes, according to World Gold Council (WGC), from 195.6 tonnes.

Central bank demand for gold remains firm

The sharp upward trend in the gold prices over the last 12 – 18 months, analysts said, has cast its shadow on the overall gold jewellery demand. The rise in gold prices in the above period, according to WCG estimates, has been due to firm demand from global central banks that contributed at least 10 per cent to gold’s performance in 2023 and potentially around 5 per cent in 2024.

Gold imports, gold prices

 

The gold bullion price in renminbi terms has risen by 37 per cent since the beginning of 2023. In dollar terms, gold prices hit $2,331/oz at the end of H1-CY24, according to WGC data, rising 12.1 per cent during this period. In rupee terms, prices surged 12.3 per cent during this period to hit Rs 62,440 per 10 grams, with an average price of Rs 58,944 per 10 grams in H1-CY24, WGC said.

In 2023, central banks added 1,037 tonnes of gold – the second highest annual purchase in history – following a record high of 1,082 tonnes in 2022, WGC said.

According to the 2024 Central Bank Gold Reserves (CBGR) survey conducted between February 19 and April 30, 2024 with a total of 70 responses, 29 per cent of central banks, WGC said, intend to increase their gold reserves in the next 12 months, the highest level they have observed since WGC began this survey in 2018. 

"The planned purchases are chiefly motivated by a desire to rebalance to a more preferred strategic level of gold holdings, domestic gold production, and financial market concerns including higher crisis risks and rising inflation," the WGC note said.