The Quiet Buyer: China's Central Bank and the Gold Pause

5 min read

For 18 months the People's Bank of China added gold to its reserves every single month. In early June it reported that it had bought none in May. The gold price fell sharply that day. A pause is not a reversal, though. To understand what central banks are really doing with gold, it pays to look past one month's headline.

The longest run of buying in years

We wrote in April about central banks as the quiet buyers behind gold's records. China was the largest of them. Its run began in November 2022. By the end of April 2024 it had added around 316 tonnes, lifting its reported holdings to 72.8 million ounces, roughly 2,260 tonnes.

In 2023 alone the People's Bank added 225 tonnes, its largest annual addition since at least 1977, according to the World Gold Council. It was the single biggest buyer of gold anywhere in the world.

Why a pause is not a retreat

The figures released on 7 June showed reserves unchanged at the end of May. Nothing was sold. The gold China has bought is still in its vaults.

Gold had just reached a new record high on 20 May. Central banks are disciplined buyers. Many prefer to add when prices are calmer rather than chase a sharp rise. China has paused before. It has also resumed before. In 2019 it bought for ten months, then stopped. It returned to the market three years later.

The same day, 7 June, also brought strong US jobs figures, which pushed back hopes of early US rate cuts. Gold fell sharply on the two pieces of news together. It recovered part of that ground through June and ended the month roughly 13% higher than at the start of the year.

Chinese households kept buying

The central bank is only part of China's story. Ordinary Chinese savers have been buying gold too. In the first quarter of this year, the World Gold Council reports, Asian gold funds saw inflows while funds in the West saw outflows, with China accounting for the bulk of the Asian increase. Global demand for bars and coins rose 3% on a year earlier to 312 tonnes.

The quarter as a whole was strong. Total gold demand, including large private deals made directly between buyers and sellers, reached 1,238 tonnes. That was the strongest first quarter since 2016. It came even though gold funds around the world lost 114 tonnes as Western holders sold. The average price over the quarter was a record $2,070 an ounce. Demand held up because the buyers who were active, in China and among central banks, were buying for the long term.

When a central bank and its own citizens are buying the same asset, the pause in one set of official figures matters less than it first appears.

The others kept buying

China is the largest buyer, not the only one. The World Gold Council reports that central banks added 290 tonnes in the first quarter of 2024, the strongest start to any year on record. Turkey added 30 tonnes. India added 19 tonnes, already more than in the whole of 2023.

India also made a striking move. In late May it was reported that the Reserve Bank of India had brought around 100 tonnes of its gold home from storage in the UK, the first move of its size since 1991. A central bank that wants its gold closer to hand is telling you how it values it.

The detail is telling. Business Standard reported that the Reserve Bank held 822.1 tonnes of gold at the end of March, of which 413.8 tonnes were stored overseas. Part of India's gold has been held at the Bank of England since before Independence. Officials said the move would also cut the storage fees India had been paying. The Reserve Bank added 27.5 tonnes in its last financial year alone. Reports suggested a similar shipment could follow in the coming months. The gold was flown home on a special aircraft under tight security and now sits in the bank's own vaults in Mumbai and Nagpur. This is a central bank that has been adding to its gold for years. About 15 years ago it bought 200 tonnes from the International Monetary Fund in a single deal. Its holdings today are larger still. A growing share of them is now kept at home, where the bank has direct control over every bar.

The date 1991 matters in India. In that year, facing a balance of payments crisis, the government pledged gold to help meet its debts abroad. Bringing gold home now, one official said, reflects the strength of the economy and confidence in it. A country that once had to send its gold abroad as security is now choosing to keep it under its own roof.

What central banks say about gold

On 18 June the World Gold Council published its annual survey of central banks. It was carried out between 19 February and 30 April, before China's pause was known. The results were clear.

Of the 70 central banks that responded, 29% said they intend to increase their own gold reserves over the next 12 months. That is the highest figure since the survey began in 2018. Some 81% expect central bank gold holdings worldwide to rise over the same period. More than two thirds expect gold to make up a larger share of global reserves in five years' time.

The reasons given were consistent: gold's performance in a crisis, its role as a long-term store of value and its freedom from the risk of default. In the World Gold Council's own figures, 88% of central banks named long-term value as a reason to hold gold and 82% named its performance in a crisis.

The survey also asked about the US dollar. Some 56% of central banks in advanced economies and 64% in emerging and developing economies expect the dollar's share of world reserves to be lower in five years. These are institutions that create money. When they choose to hold more of something that cannot be created, it says a great deal about where they think paper currencies are heading.

What it means for savers

Central bank behaviour is one of the best long-term guides to the gold market. These buyers do not trade on daily headlines. They think in decades and they buy steadily, adding more when prices are calm.

Interest rates have not moved. The Federal Reserve held in June. So did the Bank of England, with UK inflation back at its 2% target. Markets now expect cuts later this year. Lower rates tend to make gold more attractive still to savers who have been sitting in cash.

For British savers, UK legal tender gold coins such as the Britannia and the Sovereign offer a direct way to own the same asset central banks are holding, in a form you can keep yourself. Gains on them are exempt from Capital Gains Tax for UK residents.

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Sources

This article is for information only. The value of gold can go down as well as up.

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Gold Insights are independent articles, researched and written by our own team at Gold Tier Advisory.