While the Federal Reserve talks about tightening monetary policy, the Chinese central bank is heading in the opposite direction. This could boost gold demand in that country even further.
Earlier this month, the People’s Bank of China announced a 0.5% cut in financial institutions’ required reserve ratio (RRR). According to the World Gold Council, this move will inject about $1.2 trillion yuan into the Chinese economy.
This was the second RRR cut in 2021.
The PBC also cut the one-year local Loan Prime Rate (LPR) by 5 basis points. It was the first LPR cut in 20 months.
The Chinese bank made the moves in order to stimulate a sagging economy. But it also runs the risk of stoking inflation fires that are already smoldering in the Chinese economy.
This could be good news for the gold market.
The Chinese are the biggest gold buyers in the world. Demand for gold has already shown signs of recovery after the coronavirus pandemic pummelled the market. In October, Chinese gold imports reached the highest level since December 2019.
The World Gold Council noted that this monetary easing will likely put devaluation pressure on the yuan. That means Chinese investors will likely turn to gold as a safe haven.
WGC analysis of quarterly data in the past decade revealed four key factors impacting Chinese investors’ interest in physical gold investment.
- The 10-year government bond yield
A lower opportunity cost of holding gold often bodes well for local gold bar and coin demand - Inflation
Local investors tend to purchase more physical gold products for wealth preservation when inflation rises. - The local currency
Local bar and coin demand increase when there is a depreciation in the local currency as investors seek purchasing power protection. - Income
Our analysis also reveals a positive correlation between the local gold bar and coin demand and households’ income changes in the previous period. Usually, Chinese consumers buy more gold bars and coins for gifting or long-term saving purposes when their wealth expands.
The WGC concludes, “Unlike other key markets, China is entering into a different economic cycle and stepping up its easing monetary policy. We believe this could be supportive for local retail and institutional investors’ interest in gold.”
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