Gold prices have surged by approximately 28% this year, making it one of the top-performing assets. Recently, the onset of an easing cycle by major central banks, particularly the Fed, has boosted gold's appeal, providing strong tailwinds as it reaches new all-time highs.
Despite these record highs, gold remains attractive to large investors, but retail demand may face pressure. In this context, the behaviour of Chinese and Indian consumers—who represent the largest share of global demand—will be crucial in determining the future direction of gold prices.
Global Demand Overview
In the second quarter of the year, jewellery demand accounted for 44% of global gold demand, followed by bar and coin demand at 28%, central bank purchases at 19%, and the technology sector at 8%.
India and China dominate global jewellery demand, with India contributing 27% and China 22%. Similarly, China accounts for 31% of bar and coin demand, while India makes up 17%. As the data indicates, the trajectory of gold demand in China and India is a key driver that could significantly influence gold prices.
India’s Gold Market Shines with Strong Retail and Central Bank Demand
Retail demand for gold in India remains strong. This robust demand is primarily attributed to the reduction in import duties announced at the end of July and the seasonal increase in demand due to the festive period.
India's gold imports rose by 30% year-on-year from January to August. In August alone, imports reached approximately 140 tons, marking a new record, doubling compared to the same month last year.
Market reports from India indicate that buying momentum has picked up following the tax cut, with previously deferred purchases being made and a growing interest in heavier jewelry pieces. On the other hand, the initial surge in demand after the tax reduction is starting to normalize. However, the momentum is expected to continue, fueled by the festival and wedding season, which lasts from late August to December.
Rural demand in India is also showing signs of improvement. Favourable monsoons this year are expected to enhance rural economic conditions by enabling higher crop yields, thus contributing to increased gold demand.
On the other hand, one of the key drivers behind global gold prices this year has been strong central bank purchases. According to WGC data, the Reserve Bank of India (RBI) became a leading gold buyer this year, purchasing a total of 50 tons of gold by the first week of September. RBI’s recent acquisitions suggest its demand for gold remains robust.
In conclusion, India accounts for a significant portion of global gold demand, and this demand is expected to remain strong in the coming period.
China's Gold Demand Falters Amid Rising Prices and Economic Uncertainty
Chinese consumers continue to struggle with ongoing economic challenges, while rising gold prices are putting further pressure on retail demand.
In China, gold demand typically rises in September and October due to jewelry fairs and the National Day holiday, leading to increased withdrawals from the Shanghai Gold Exchange (SGE) ahead of these events.
In August, withdrawals rose by approximately 14% throughout the month, indicating increased seasonal demand. However, compared to the same month last year, withdrawals were 37% lower, highlighting weaker retail demand.
After starting the year strong, jewellery demand has weakened steadily since the beginning of March. Chinese consumers' purchasing power for gold jewelry fell to its lowest level since the second quarter of 2013.
Rising prices and uncertainties about the country's economic outlook are dampening jewelry demand, while consumer savings are on the rise. A portion of these savings is being diverted into gold bars and coins, providing some support for gold demand. Meanwhile, the part of savings accumulating in deposits is seen as a potential demand for gold in the future.
On the other hand, the People’s Bank of China (PBoC), which made record gold purchases between January and April, has paused gold acquisitions for the past four months. The PBoC added a total of 29 tons of gold to its reserves this year, but its halt in purchases leaves a notable gap in global gold demand.
In conclusion, the trajectory of China’s retail demand has the potential to weigh down global demand and price momentum. Therefore, the recovery of the Chinese economy is expected to remain crucial for the gold market in the upcoming period.