A recent monthly review of the Chinese gold market from the World Gold Council highlighted a divergence in the performance of international and local gold prices in February. The US dollar-denominated LBMA Gold Price PM rose by 4.8%, while the renminbi-denominated Shanghai Gold Price PM fell by 1.3%. This divergence may be attributed to two primary factors: a 1.4% appreciation of the renminbi against the US dollar and the suspension of local market trading and physical gold withdrawals during the Chinese Spring Festival holiday.
Despite the holiday period, upstream physical gold demand demonstrated notable resilience. The volume of gold withdrawn from the Shanghai Gold Exchange (SGE) reached 85 tonnes, a decrease of only 5 tonnes compared to the equivalent Spring Festival month last year. This relative strength was supported by increased pre-holiday stock replenishment by industry players and robust investment demand.
The divergence in gold price trends between Eastern and Western markets was pronounced in February. Geopolitical risks and falling US Treasury yields buoyed the dollar-denominated LBMA price. Since March, gold prices have experienced minor declines as investor expectations for future US interest rate moves shifted. However, ongoing instability in the Middle East has fueled safe-haven demand, helping the LBMA price to hold above $5,000 per ounce and the Shanghai price to remain above 1,100 yuan per gram.
The SGE's gold withdrawals in February totaled 85 tonnes, a 32% decrease from January. This decline was largely due to fewer working days in February (14) compared to January (20) and extended holiday closures at many factories, including jewelry manufacturers and bar refiners, which further suppressed upstream demand. The resilience compared to the previous year's Spring Festival period is likely due to lower renminbi gold prices supporting pre-holiday stocking needs and seasonally strong bar sales.
In February, Chinese gold-backed exchange-traded funds (ETFs) saw inflows for the sixth consecutive month. Approximately 4.5 billion yuan flowed in, increasing total holdings by 3.6 tonnes to a record high of 290 tonnes. However, these inflows were insufficient to fully offset the impact of the lower local gold price, leading to a slight 1% decrease in total assets under management to 331 billion yuan. Early-month price volatility prompted some investors to reduce ETF holdings, but as domestic prices stabilized, investors returned, driven by bargain-hunting and heightened safe-haven demand amid global and regional geopolitical tensions. The reduced number of trading days due to the holiday still limited the overall inflow volume for the month. Despite price fluctuations, inflows into Chinese gold ETFs have accelerated since March, primarily driven by escalating global geopolitical tensions and increased safe-haven demand due to stock market volatility.
The average daily trading volume for gold futures on the Shanghai Futures Exchange (SHFE) increased by 11% month-on-month to 505 tonnes. Increased price volatility boosted interest from tactical traders, a trend particularly evident in early February when both volatility and trading volumes surged significantly.
The People's Bank of China (PBoC) increased its official gold reserves by another tonne in February, bringing the total to 2,309 tonnes. Gold now accounts for 10% of China's total foreign exchange reserves, which themselves grew by 0.9% month-on-month to $3.9 trillion. This marks the 16th consecutive month of increases, signaling the growing importance of gold as a tool for portfolio diversification and a hedge against uncertainty in the current global landscape.
Looking ahead, the gold jewelry sector may experience some seasonal weakness. This trend could be exacerbated if gold prices continue to rise. Meanwhile, gold investment demand is expected to remain strong against a backdrop of persistent global and regional geopolitical risks.