Shining example: how China is propelling gold’s record-breaking rally

Gold’s rise to all-time highs above US$2,400 an ounce this year has captivated global markets. China, the world’s biggest producer and consumer of the precious metal, is front and centre of the extraordinary ascent.

Worsening geopolitical tensions, including war in the Middle East and Ukraine, and the prospect of lower US interest rates all burnish gold’s billing as an investment. But juicing the rally is unrelenting Chinese demand, as retail shoppers, fund investors, futures traders and even the central bank look to bullion as a store of value in uncertain times.

China and India have typically vied over the title of world’s biggest buyer. But that shifted last year as Chinese consumption of jewellery, bars and coins swelled to record levels. China’s gold jewellery demand rose 10 per cent while India’s fell 6 per cent. Chinese bar and coin investments, meanwhile, surged 28 per cent.

And there is still room for demand to grow, said Philip Klapwijk, managing director of Hong Kong-based consultant Precious Metals Insights. Amid limited investment options in China, the protracted crisis in its property sector, volatile stock markets and a weakening yuan are all driving money to assets that are perceived to be safer.

“The weight of money available under these circumstances for an asset like gold – and actually for new buyers to come in – is pretty considerable,” he said. “There isn’t much alternative in China. With exchange controls and capital controls, you can’t just look at other markets to put your money into.”

Although China mines more gold than any other country, it still needs to import a lot and the quantities are getting larger. In the last two years, overseas purchases totalled over 2,800 tons – more than all of the metal that backs exchange-traded funds (ETFs) around the world, or about a third of the stockpiles held by the US Federal Reserve.