Gold loses its lustre as higher prices keep China investors, shoppers away

Demand for gold from the world’s biggest consumer has slowed with the weakened yuan. (File pic)

China’s shoppers and investors lost their appetite for gold this year – and there’s little expectation of any major improvement in 2020 as slowing growth and higher prices crimp consumer spending.

Jewelry consumption is forecast to drop 4% to about 660 tons this year, according to forecasts from Metals Focus Ltd, while a decline of more than 20% to around 240 tons is seen for investment demand.

Slowing growth and concerns over the trade war have hit consumer sentiment and a rally in prices is keeping some investors away, said Nikos Kavalis, a director at the London-based research firm. He expects demand to stabilise next year.

Economic growth in the world’s biggest gold consumer is sputtering.

The official forecast of 6% to 6.5% is the slowest on record, and the 6.2% pace reported in the second quarter is the weakest since the government began releasing data in 1992.

Trade figures Monday showed China’s total exports and imports shrank more than expected in September, as existing US tariffs and the ongoing slowdown in global trade combined to undercut demand.

“The economic conditions in the country are throwing a spanner in the works and that’s keeping jewelry consumption under pressure,” said Kavalis.

The prolonged trade war and soaring local food prices have crimped consumer spending for discretionary products, he said.

Weaker yuan

Signs of progress in US-China trade negotiations lifted US equities Friday and sent Treasury yields higher, though sentiment may be capped as investors voiced skepticism on the accord.

Another factor hurting demand has been the weaker yuan. While Chinese shoppers may be shying away from buying gold, investors worldwide are piling in to bullion.

That’s pushed prices in dollars up 16% this year after hitting US$1,557.11 an ounce last month, the highest in more than six years. Spot gold was at US$1,487.37 on Monday.

“Back in 2017 and 2018, you had a boost in demand from more sophisticated type investors buying gold as a hedge against the yuan’s depreciation,” said Kavalis.

“Following the rise in the gold price that we’ve seen in the summer, it looks like there is less of that because now a lot of these investors are also worried that the gold price is looking rich.”

The price rally from June saw China’s jewelry demand grinding to a halt, with showrooms reportedly deserted toward the end of the second quarter, the World Gold Council said in its quarterly report.

Still, the retail landscape continues to develop as leading brands expand their networks and extend their reach into lower-tier cities, the council said.

Import drop

“The perspective now, particularly looking at the jewelry market, is moderate growth over the longer run, rather than the sort of massive growth you saw in the past when people were opening stores like crazy,” said Philip Klapwijk, managing director of Hong Kong-based consultant Precious Metals Insights Ltd.

“The pace of that growth isn’t going to be what it used to be.”

Klapwijk, who’s also a chief consultant at Metals Focus, will be moderating a panel at the Global Precious Metals Conference in Shenzhen that runs Oct 13 to 15.

The China Gold Association’s chairman Xin Song is due to make opening remarks at the annual event organised by the London Bullion Market Association.

The country’s imports will drop sharply this year as many Chinese investors cashed in their purchases made in 2012 and 2013 after prices rallied, said Zhang Yongtao, secretary general of the China Gold Association.

This has boosted domestic supply and reduced the need for imports, he added.

China’s imports of gold in unwrought forms fell 42% to about 561 tons from February to August in 2019, from the same period a year ago, according to data on the customs website.