Gold Fell 8.5% in September; Why Did China's Central Bank and Investors Buy?

Gold Fell 8.5% in September; Why Did China's Central Bank and Investors Buy? At a Glance: According to the World Gold Council report, China's central bank bought 23 tonnes of gold in September, its largest monthly purchase since October 2023. China's gold ETFs took in 11 tonnes in September, bringing their total holdings to 304 tonnes, a record for month-end. The dollar gold price fell 8.5% in September and [...]

According to the report of the World Gold Council, the Central Bank of China bought 23 tons of gold in September; This is its biggest monthly purchase since October 2023.

China's gold ETFs received 11 tons of inflows in September, and their total gold holdings reached 304 tons; A record for the end of the month.

The price of gold in September fell to 8.5 to the dollar and 5.5% to the yuan, but the yuan closed the third quarter with a 3% increase.

However, the wholesale demand for gold in the third quarter was 21% less than the previous year and reached 234 tons.

Gold fell in September, but China used the drop to buy. According to the report of the World Gold Council, the Central Bank of China added 23 tons of gold to its reserves in September. The gold held in Chinese ETFs (stock exchange funds that hold gold) also reached 304 tons; A record for the end of the month. In this month, the price of gold fell by 8.5% to the dollar and by 5.5% to the yuan.

Ri Jia, head of China research at the World Gold Council, said China's central bank used gold's cheapening to boost purchases. The September purchase was the bank's largest monthly purchase since October 2023 and extended its monthly purchase streak to 23 consecutive months. The total purchase of the third season was 63 tons; The strongest season since the third season of 2023. From the beginning of the year to the end of September, this bank bought 103 tons and its official gold reserves reached 2,410 tons; 8.5% of total reserves.

Investor demand and the physical market

China's gold exchange funds received 11 tons of inflows in September; The third consecutive monthly increase. In the third quarter as a whole, $3.9 billion came to these funds, and annual inflows were on track for a record. Jia considers three factors to be effective: the need to diversify the capital portfolio against the sharp drop in Chinese stocks, the drop in government bond yields, and the successive announcements of gold purchases by the central bank. The drop in bond yields reduced the opportunity cost; That is, the profit that is lost by keeping gold instead of bonds, became less.

Wholesale demand rose in September from August: Banks and jewelers withdrew 92 tons of gold from the Shanghai Gold Exchange; 48% more than August. Jewelers usually fill their inventory before the national holiday in early October, and the price drop helped the trend. According to Jia, anecdotal evidence suggests bullion sales also improved, as many saw the lower price as a better entry point. The long Mid-Autumn Festival holiday at the end of September and the seven-day national holiday at the beginning of October also significantly improved the demand for jewelry, bullion and coins. However, the September harvest was 22% lower than the previous September and remained below the historical trend.

Weakness in jewelry consumption and price outlook

The whole picture of the third season shows the same thing: the wholesale demand decreased by 21% compared to the third season of the previous year and reached 234 tons. This figure was 44% less than the ten-year average (418 tons). Jia considers the persistent weakness of the gem consumption to be the main factor. The futures market (future delivery contracts) also calmed down as prices softened: the average daily transaction of the Shanghai Futures Exchange decreased by 9% compared to August and reached 360 tons.

According to the analytical model of the World Gold Council, the jump in the yield of US government bonds and the strengthening of the dollar in September put pressure on the price of gold. The Federal Reserve raised interest rates that same month, and the conflict between the United States and Iran, keeping inflationary concerns high, made the expectation of further hikes stronger. But the price of gold in yuan closed the third quarter with a growth of 3%. In early October, the price calmed down: around 900 yuan per gram in China and above 4100 dollars per ounce in the world market.

According to Jia, geopolitical tensions and their effect on energy prices, along with inflation expectations and the future path of the Federal Reserve's interest rates, are key to gold's short-term movement. He expects macro conditions to support bullion investment and the peak jewelry season in the fourth quarter to boost demand. But low purchasing power and low consumer confidence may continue to weigh on demand tonnage (weight of gold purchased).

In a month in which gold prices fell 8.5 percent, China's central bank purchases reached their highest monthly level since October 2023 and ETFs set a month-end record. In contrast, wholesale demand and jewelry consumption remained weak.

This analysis was taken from the report of Kitco News website and it was rewritten in Farsi language by Sefir Arjan's team.