Despite pausing its gold purchases in May and June, China still has a strong appetite for official gold acquisitions, according to a policy insider, industry experts, and data. This is because China’s gold holdings remain low as a share of its reserves, and geopolitical tensions persist.
China’s gold buying helped drive up spot gold prices in April and May. However, the pause in purchases is no longer seen as immune to price sensitivity. Nonetheless, ongoing geopolitical risks are expected to keep China’s long-term program to diversify its exposure from U.S. dollar-denominated assets active.
A Chinese policy insider involved in internal discussions, who declined to be named due to the sensitivity of the matter, stated that China’s gold reserves need to rise in absolute and relative terms because they do not match the status of the world’s second-largest economy. The insider added that geopolitical factors, such as the Russia-Ukraine war and the Middle East conflict, were among the drivers of China’s gold demand in recent years.
The People’s Bank of China (PBOC) has never publicly commented on what prompted the resumption of gold buying in November 2022 after a more-than three-year pause. However, the PBOC was the world’s largest single buyer of gold in 2023, with its net purchases of 7.23 million ounces, the most by China for at least 46 years, according to the World Gold Council.
The policy insider attributed the pause in buying in May and June to “high prices.” However, the spot price has since regained ground and hit a record high during trading on Wednesday, driven by improved U.S. rate cut hopes.
China has the world’s largest foreign currency reserves, but gold’s share of its overall reserves, while at a record high of 4.9%, is still low compared to the global average of 16%. Experts believe that China’s long-term need to diversify its reserves will keep its gold buying program active, despite the recent pause.