Several Chinese banks have recently been allocated new gold import quotas by the central bank, reflecting anticipation of a potential revival in demand despite current record-high prices, according to four sources familiar with the situation. These quotas, distributed in August, come after a two-month pause largely due to a slowdown in physical gold demand following a strong bullish market.

The People’s Bank of China (PBOC) has implemented these quotas to manage the influx of bullion into China, the world’s largest consumer of gold. The pause in issuing new quotas earlier this year was driven by banks responding to muted demand rather than any direct intervention by the PBOC.

Current Market Trends and Future Expectations

Spot gold has surged by 21% this year, reaching an all-time high of $2,500.99 per ounce on Friday, buoyed by a weakening U.S. dollar and growing expectations of U.S. monetary easing in September. Analysts suggest that if Chinese demand increases once more, it could further elevate global gold prices.

However, despite the issuance of new quotas, there is uncertainty about whether these quotas will be fully utilized in the near term. “The quotas have been issued, but the local premium to offshore is low, so there is no guarantee that the quotas will be used until things improve,” said one of the sources. While jewelry demand remains weak, investment demand is holding steady, they added.

Market Conditions and PBOC’s Role

China’s central bank has historically adjusted gold import quotas based on the strength of the yuan against the dollar, often curtailing imports when the yuan is weak. However, the recent pause in gold imports was mainly driven by banks themselves due to subdued demand. Bernard Sin, regional director of Greater China at MKS PAMP, noted, “Actual gold imports have been limited due to subdued demand. This suggests that the Chinese market is currently well-supplied with physical gold.”

The PBOC, which was the world’s largest single buyer of gold in 2023, has also paused its gold purchases for three consecutive months as of July. The central bank’s gold holdings stood at 72.8 million fine troy ounces at the end of last month, according to the World Gold Council.

Market Sentiment Reflecting Weak Demand

Further indicating weak demand, gold dealers in China were offering discounts of $8.5 to a $5 premium per ounce on international spot prices this week, compared to a premium as high as $18 the previous week.

The PBOC did not immediately respond to Reuters’ request for comment regarding these developments.

(Adapted from Reuters.com)

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