Plenty of room for China to keep buying gold
Institutional interest in gold also growing, according to World Gold Council and Sprott
After a six-month break, China has been buying gold again, something which leading commentators expect to continue through 2025.
The People’s Bank of China reportedly increased its gold holdings in November and December.
World Gold Council strategist Joseph Cavatoni told Bloor Street Capital’s Virtual Gold Conference on Saturday that global central bank purchases of gold in 2024 were strong, albeit not quite reaching 2022’s record levels, and accounted for around a quarter of gold demand.
While the central bank purchase figures for 2024 are still being compiled, Cavatoni said China was likely the fourth-largest buyer of gold for the year behind Poland, Turkey and India.
“We've been getting updates over the last month that they've come back into the market,” he said.
“They had a six-month period where they stopped buying through officially reported channels.”
China is sitting on around US$2 trillion in foreign exchange reserves, with Cavatoni estimating that around 5% of that was gold.
“They have accumulated a total of about 2300 tons over the course of this 14-year period, for example, and I'd say to you that they're very big in terms of the space, but if you look at what the capacity could be like, there's plenty of room for them to continue to allocate, as is the case for a lot of other emerging market central banks,” he said.
“The US is holding near 8200 tons of gold, so if you think about it contextually, that could give China a lot more room to grow.”
Sprott Asset Management CEO and Sprott Inc senior managing partner John Ciampaglia described 2024 as “the year of the central bank”.
“I think they had the single biggest impact on the gold price and the flows,” he told the same conference.
“It wasn't just China. Everyone talks about how China are basically recycling their US dollars and US Treasuries into hard assets like gold … and we think that recycling trend is going to happen for a long time.
“And yes, China will try to talk the price of gold down if it gets a little bit too hot in its minds, but we think that's not going to be effective, in that they're going to be steady buyers of gold longer term.
“It's not just the Chinese central bank. We've seen the Indian central bank, the Turkish, the Singaporean, the Polish – they've all been buying large quantities of gold, and this is really, I think, part of a shift in their foreign exchange reserves.
“They're moving away from paper currencies, and they're adding more hard currency, which is gold, and we think this is part of this kind of bipolarization of the world that's happening. Geopolitical risks are changing, and we think it's going to favor gold longer term.”
What about institutional buyers?
Cavatoni, who delivered a keynote address at the 2024 Gold Forum Americas, is expecting to see an uptick in interest from institutional investors, but says most institutions are maintaining a holding of gold.
“They're holding it because of the risk hedge that comes along with having it in their portfolio, and I'm speaking mainly about Western institutions when I talk to this profile, but most have not added, because, looking at cash deposits, what you can earn in the bond market, what those rate levels being at high levels affords you, and the cost of carrying gold in that kind of an environment, it makes sense to continue to keep the hedging element gold in your portfolio, but not to add to it,” he said.
“But in a world where we start to see rates coming off, that will shift the dynamic we expect, and this is where a lot of our conversations are taking place.”
Cavatoni is expecting more large-scale allocations of gold to come into play this year.
“It might slow a little bit with respect to the speed with which rate cuts are going to take place from the Fed, but our expectation is that institutions will continue to look at that 1.5-2% allocation and maybe bring it up to 2.5-3%, maybe even up to a 5% allocation into ‘25 and into ‘26 as well,” he said.
Ciampaglia said in 2024, around US$400 million came into the Sprott Physical Gold Trust.
“Which is obviously an enormous amount of money, but relative to the performance of gold last year, we were actually a little disappointed with that,” he said.
“We thought there would be more investor interest in gold, and I think it was really because of other asset classes performing very well, things like tech stocks, the magnificent seven stocks, I think they obviously diverted a lot of the attention away from gold amongst some investor groups.”
Ciampaglia said there was growing institutional interest in Sprott’s products.
“That is a big change. In the last three years, I would say, more and more investors, I think, are starting to realize the importance of having physical metals in their portfolios again, after largely ignoring them from, I'd say, 2011 to 2020,” he said.
“This is starting to come back, and it's important, because when you look at how much exposure institutional investors have to precious metals, it's really tiny in aggregate, and many institutions have zero exposure, so it doesn't take a lot of capital to start shifting around for that to have an impact on flows and obviously the asset prices themselves.”
However, gold ETFs experienced a fourth consecutive year of net outflows in 2024, which Ciampaglia described as a good barometer of institutional interest.
“So even though the price of gold appreciated meaningfully last year, institutional investors, we think, were net sellers,” he said.
“So all you need to do is have some of that institutional buying power come back into the gold market, and you can have a very powerful set of buyers all moving in the right direction.”