Gold has received more investment than all other major Chinese asset classes in the first half of this year, says the World Gold Council (WGC).
In a WGC blog post, research manager Ray Jia says gold demand in China, particularly investment demand, has benefited from rising concerns about the economy, as well as the lower opportunity cost amid the Covid-19 outbreak and the central bank’s response to it.
Although signs of an economic recovery are emerging, the WGC still believes gold’s attractiveness as a safe haven asset will not fade.
China’s gross domestic product contracted by 6.8% in the first quarter, which marks the largest drop on record, which was a primary driver of gold demand.
Jia explains that Chinese investors’ appetite for gold has improved significantly in the first half of this year. To cushion the pandemic’s economic shock, the People’s Bank of China and the Treasury Department introduced various accommodative policies, resulting in a lower benchmark policy rate and a higher M2 money supply.
The reduction in the opportunity cost for holding gold combined with concerns of currency devaluation had pushed up Chinese investors’ allocation to gold; for example, Chinese gold exchange-traded funds’ total holdings have increased by 11.6 t, or $647-million, in the first half of the year.
As of May, 90% of all Chinese companies had returned to work, resulting in an improvement in the country's Purchasing Managers Index and industrial output.
Jia says China’s accommodative fiscal and monetary policies had underpinned the country’s recovery.
“In addition to injecting liquidity to financial and banking systems directly through various lending facilities, the People’s Bank of China also made a 30-basis-point cut in the one-year loan prime rate late in January.
“Further, widening 2020’s fiscal budget deficit and special Covid-19 bonds, worth trillions of renminbi, were listed in the government’s fiscal policy direction to shore up the economic growth this year,” he notes.
While an economic recovery may improve investor sentiment and potentially reduce gold’s appeal, such recovery could also potentially lead to a rise in consumers’ wealth, says the WGC.
The WGC’s analysis suggests that the rising consumer expenditure is positively correlated to gold jewellery and bar and coin sales in China. This, in turn, could provide some support for gold’s performance and offset some of the headwinds from lower investment demand.
Jia points out that it is still too early to rule out a recurrence of Covid-19 infections.
He further states that it is important to recognise the diversity in gold demand. In tested times, gold’s role as a strategic asset allocation becomes more relevant for investors searching for safe-haven assets.
In fact, the strong investment demand was the main contributor to the overall 1% year-on-year rise in the global gold demand in the first quarter of the year, despite the negative effect that the Covid-19 outbreak had on other gold demand sectors such as jewellery and technology.
However, a revival of China’s economy should support an improvement in gold jewellery sales, gold used in the technology sector and long-term saving demand.
While gold could remain a relevant asset in the current environment, such strength in consumer demand could partially offset the deceleration that improved financial market sentiment may have on gold’s allure as a hedge.
“Gold’s diverse sources of demand contribute primarily to its effectiveness as a diversifier and help its performance over the long run.
“According to our recent report on the relevance of gold as a strategic asset, gold in renminbi has delivered returns comparable to Chinese stocks and higher than Chinese bonds and commodities in the long term,” Jia concludes.