Chinese investors holding 150 billion yuan (US$21 billion) in gold exchange-traded funds (ETFs) are expected to benefit from a prolonged period of strong gains in gold prices, driven by strong demand, as per Swiss banks Julius Baer and Lombard Odier.
Despite rising by nearly 50 percent this year, gold prices are expected to reach US$4,000 per ounce within the next 12 months, according to Julius Baer, while Lombard Odier forecasts the metal will climb to US$3,900. JPMorgan Private Bank is even more optimistic, anticipating gold to reach between US$4,050 and US$4,150 by mid-next year. On Thursday, spot gold was being traded at US$3,875 per ounce, following a record peak of US$3,895.33 the previous day.
Despite a significant year-to-date increase, gold continues to serve as a valuable addition to a diversified portfolio and a safeguard against political and economic uncertainties, according to UBS Global Wealth Management's chief investment office in a report from last month. 'We anticipate that gold will gain from a weaker dollar, strong central bank purchases, reduced real interest rates, and investor worries regarding increasing government debt, the possibility of financial repression, and persistent geopolitical challenges.'
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This would be positive news for Chinese investors, who have few investment choices other than yuan-denominated stocks and real estate, and face limited access to foreign equities. For the time being, only the performance of small-cap companies listed on the mainland...stockscan mirror gold's performance. A measure of the technology sector on the Shanghai Stock Exchange has risen 45 percent this year due to a worldwide surge in interest around artificial intelligence.
Currently, 13 gold ETFs trade on the Shanghai and Shenzhen exchanges, according to Bloomberg data. The biggest among them is Hua An Yifu Gold ETF, with 59.8 billion yuan of assets under management. The 13 funds have returned 42 per cent so far this year, tracking the spot gold price on the Shanghai Futures Exchange.
Gold's impressive performance is sharply different from the US dollar index, which usually moves in the opposite direction of the metal and has dropped almost 10 percent this year.
Central banks around the world have increased their gold purchases as a means of diversifying their foreign reserves, protecting themselves from potential risks associated with US tariff measures and fiscal deficits. Data from the industry shows that they acquired approximately 480 tonnes of gold in the first half of the year, representing a 12 per cent rise compared to the same period last year.
This brought the total purchases in 2024 to 1,136 tonnes, marking the second-largest annual figure ever recorded. The People's Bank of China increased its gold reserves for the tenth straight month in August, raising its holdings to approximately 2,200 tonnes, which accounted for 8.6 percent of the country's foreign reserves. At the same time, China's holdings of U.S. Treasuries dropped to a 17-year low of $730.7 billion in July, as reported by official U.S. government data.
US President Donald Trump's ongoing efforts to influence monetary policy have also supported the value of gold, causing investors to cast doubt on the Federal Reserve's reliability. Trump has repeatedly advocated for interest rate reductions, and recently, his administration appointed Stephen Miran, an advocate for more accommodative monetary policy, to the Fed's board of governors.
Miran opposed the Federal Reserve's choice to lower the interest rate by a quarter point during last month's policy meeting, advocating instead for a half-point reduction to avoid worsening conditions in the job market. Excessive easing could lead to a rise in inflation, which is still above the Fed's 2 percent target.
"The independence of the Federal Reserve appears to be under threat due to the US administration's attempts to alter the composition of the central bank's board of governors," Lombard Odier stated in a September report, which also noted that core US inflation might exceed 3 percent in the coming year.
Investors have increased their bets on gold as indicators show that economic growth and the job market in the United States are slowing, fueling hopes for more interest rate cuts. Federal Reserve Chair Jerome Powell has already indicated that the labor market will take precedence over inflation when determining monetary policy. Gold typically moves in the opposite direction of interest rates.
The markets appear to be entirely concentrated on the projection of US economic growth and US monetary policy, with worries regarding the Fed's independence adding further backing," stated Carsten Menke, head of next-generation research at Julius Baer. "Anticipations of additional interest rate reductions have become a major factor influencing [gold's] price movement even though US monetary policy has not yet turned accommodative.
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This piece was first published in the South China Morning Post (www.scmp.com), a top news outlet covering China and Asia.
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