In August, gold prices posted a sharp increase, with the London afternoon fix in USD terms and the Shanghai afternoon benchmark price in RMB terms climbing 13% and 8.4%, respectively, according to the World Gold Council. However, the upward momentum softened in early September, even as China's gold ETF holdings in the domestic market rose by 11 tonnes to 293 tonnes during August, with inflows persisting into the start of September.
The rally in gold prices and an improvement in market sentiment have driven notably more active trading in gold futures. Meanwhile, a counter-seasonal decline in gold withdrawals from the Shanghai Gold Exchange points to cooling demand for bars and coins, alongside continued weakness in the jewelry sector. In August, the People's Bank of China expanded its gold reserves by 20.2 tonnes, marking its largest monthly purchase since October 2023 and extending its buying streak to 22 consecutive months.
Gold's August rebound and the factors behind it
Gold delivered its strongest monthly performance since January, with the short-term attribution model indicating that trend momentum was the primary driver of the rebound. Strong contributions from gold ETF and futures positioning provided key support, while investors ramped up buying amid shifting Federal Reserve rate expectations and escalating concerns over U.S. debt issues. The RMB-denominated price performance was comparatively weaker, largely due to the appreciation of the Chinese yuan and softer domestic investment momentum.
In early September, hawkish comments from the Fed Chair and robust U.S. labor market data rekindled expectations of a rate hike that month. Although the upward trend momentum in gold weakened, a softer U.S. dollar offered some price support.
Continued inflows into China's gold ETFs
In August, total holdings in China's gold ETFs increased by 11 tonnes to 293 tonnes, while assets under management in these funds grew by 10 billion USD to 282 billion RMB. Key drivers included the stabilization and rebound of domestic gold prices, further declines in Chinese government bond yields, and the People's Bank of China's ongoing announcements of gold purchases. In early September, as bond yields continued to fall and equities remained lackluster, Chinese investors kept adding to their gold ETF positions.
Rising futures volumes and net long positions
Activity in the gold futures market picked up notably in August. The average daily trading volume of gold futures on the Shanghai Futures Exchange surged 36% month-on-month to 396 tonnes, while net long positions held by the top 20 gold futures participants increased by 37 tonnes to 154 tonnes, reflecting improved sentiment as prices rebounded during the month.
Further decline in Shanghai Gold Exchange withdrawals
Gold withdrawals from the Shanghai Gold Exchange fell 22% month-on-month and 27% year-on-year to 62 tonnes in August, a counter-seasonal drop. This was mainly due to cooling investment momentum for bars and coins, along with persistently weak jewelry demand. Despite higher closing prices at month-end, some long-term physical gold investors opted to stay on the sidelines, waiting for a clearer upside trend, while others continued to search for better entry points.
Jewelry demand remained weak on a year-over-year basis, as prices were significantly higher than last year and the additional value-added tax burden continued to suppress consumption. However, restocking demand from jewelry manufacturers picked up ahead of new product launches and trade shows typically held in September. Anecdotal evidence suggests that manufacturers increased restocking early in August when prices began to rise, but turned cautious as price volatility intensified later in the month. Meanwhile, the trend toward lighter-weight products continued to weigh on upstream physical demand measured in tonnes.
Accelerated gold purchases by the People's Bank of China
In August, the People's Bank of China announced an increase of 20.2 tonnes in its gold reserves, the largest monthly purchase since October 2023. By the end of August, China's official gold reserves had risen for 22 consecutive months to reach 2,387 tonnes, accounting for 9% of total foreign exchange reserves, up from 8% in July. This underscores the central bank's focus on diversifying reserves and enhancing resilience amid rising geopolitical uncertainty.
Gold imports fell in July
China's gold imports totaled 118 tonnes in July, down 34 tonnes from June, with the month-on-month decline mainly driven by weaker upstream physical demand. On a year-over-year basis, net gold imports rose 34%. The World Gold Council attributes this annual increase to higher domestic-international price premiums and sustained strength in bar and coin demand compared to the previous year, despite sluggish jewelry consumption.
Looking ahead, gold price movements will remain a key factor influencing bar and coin investment, while declining Chinese government bond yields and stock market uncertainty could provide ongoing support for related demand. Meanwhile, jewelry demand is expected to receive a seasonal boost, as historical patterns show that retailers typically step up restocking ahead of the peak season in the fourth quarter.