China likely to continue buying gold

China may continue increasing its official gold reserves to enhance financial security, as part of a broader trend among central banks worldwide to diversify their international reserve holdings — a development that could prop up investment demand for the precious metal, analysts said on Thursday.

They commented as China's official gold reserves came in at 73.96 million ounces at the end of July, up from 73.9 million ounces a month earlier, marking the ninth consecutive month of rises, the State Administration of Foreign Exchange said on Thursday.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, attributed the gold holdings increases by the People's Bank of China, the country's central bank, to the growing demand for optimizing reserve structure, given that gold prices are likely to stay on an upward trend amid a volatile global political and economic situation.

"Looking ahead, we believe that continued gold purchases by China's central bank are likely to remain a strategic direction," said Wang.

He estimates that gold accounted for about 7 percent of China's official international reserves — mainly consisting of foreign exchange reserves and gold holdings — as of the end of July, significantly lower than the global average of around 15 percent.

The country's foreign exchange reserves, according to SAFE, came in at $3.2922 trillion as of the end of July, down 0.76 percent or $25.2 billion from the previous month, amid a rising US dollar index and a mixed performance of global financial markets.

Given the need to optimize the structure of international reserves, Wang pointed to the necessity for China to keep increasing gold holdings while moderately reducing holdings of US Treasuries, as gold is widely accepted as a final means of payment.

"Increasing gold reserves can strengthen the credibility of the country's sovereign currency and help create favorable conditions for advancing the internationalization of the renminbi."

A recent survey conducted by the World Gold Council shows that 95 percent of central bank respondents expect global central bank gold reserves to increase over the next 12 months.

The council said central bank gold demand remained healthy at about 166 tons in the second quarter, though down 21 percent year-on-year.

Ray Jia, China research head of the WGC, said that central banks' continued interest in boosting reserves of the yellow metal is likely to be a key factor propping up gold prices going forward, a trend that could encourage retail investors' appetite for gold.

"The diversification of global central banks from the US dollar, or the trend toward a multipolarization of global reserves, we believe, will continue in the coming years and will not be easily reversed or undergo significant changes," Jia said.

Despite the fact that central banks worldwide have slowed their gold purchase pace in the first half, WGC's full-year projection of central banks' gold purchases remains above the five-year average, approximately at a level of 600 to 700 tons, he said.

Nevertheless, Jia noted that there are still many factors that may prompt investors to choose assets other than gold. "For instance, since July, China's equity markets have generally performed well. A rise in risk appetite often weighs on investment demand for gold and for gold exchange-traded funds in particular."

The council said that gold investment demand in China may remain strong in the second half amid persistent global geopolitical and economic risks and uncertainties over domestic growth, adding that the two factors are expected to sustain investor appetite for safe-haven assets such as gold bars and coins.