China's Gold Buying Break Seen as Fleeting Given Its Long-Term Needs

Thomas

Economic

Commodity

Central Bank

Summary:

China still has plenty of appetite for official gold purchases despite pausing in May and June...

China still has plenty of appetite for official gold purchases despite pausing in May and June, as its bullion holdings remain low as a share of reserves and geopolitical tensions persist, according to a policy insider, industry experts and data.

Beijing's gold buying, which helped the spot price rally in April and May, is no longer perceived to be immune to price sensitivity, but ongoing geopolitical risks are expected to keep its longer-term programme to diversify exposure from U.S. dollar-denominated assets active.

China's gold reserves need to rise in absolute and relative terms because they do not match the status of the world's second-largest economy and gold's share of its reserves is the lowest of any major economy, said a Chinese policy insider involved in internal discussions who declined to be named due to the sensitivity of the matter.

"But we need to look at prices - it's impossible for the central bank to maintain a constant amount of purchases each month," the insider said, adding that geopolitical factors spurred by the Russia-Ukraine war and the Middle East conflict were among drivers of China's gold demand in recent years.

Officials at the central bank, the People's Bank of China (PBOC), have never publicly commented on what prompted a resumption in gold buying in November 2022 after a more-than three-year pause.

Eight months after Western sanctions froze $300 billion of Russia's official reserves, about half of Moscow's total, the PBOC started reporting gold purchases and kept doing so for 18 months, forming a pillar for global gold prices to hit record highs in 2024.

The PBOC was the world's largest single buyer of gold in 2023, with its net purchases of 7.23 million ounces the most by China for at least 46 years, according to the World Gold Council.

But when it made no purchases in May and June this year, spot prices came under pressure, leaving the market guessing about China's future appetite.

The policy insider attributed the pause in buying to "high prices". The spot price, which regained ground after a dip in June, hit a record high during trading on Wednesday on improved U.S. rate cut hopes.

The PBOC and foreign exchange regulator State Administration of Foreign Exchange did not respond to Reuters' requests for comment.

China has the world's largest foreign currency reserves, at $3.22 trillion in June. But gold's share of China's overall reserves, which include its reserve position and special drawing rights (SDRs) at the International Monetary Fund, while at a record high of 4.9% is low compared to the global average of 16%.

Developing and emerging market countries typically have a much lower share of gold in reserves than advanced economies, which have smaller currency reserves. China's Gold Buying Break Seen as Fleeting Given Its Long-Term Needs_1

China's Gold Buying Break Seen as Fleeting Given Its Long-Term Needs_1

China's Gold Buying Break Seen as Fleeting Given Its Long-Term Needs_2

"Given that base and very large scale of FX reserves we believe the PBOC will be buying gold at higher volumes for decades," said Nitesh Shah, commodity strategist at WisdomTree.

Demand from investors in China is also set to stay strong, he said, amid a prolonged property crisis and as central bank purchases give confidence in gold as a store of value.

"The official sector buying is a free advertisement for gold in China," said Shaokai Fan, global head of the central banks sector at the World Gold Council. "In the sense that if the central bank is buying gold, maybe I, as a retail investor, shall buy some too."

Russian Precedent and Secrecy

Putting more reserves in gold is a matter of security because bullion can be stored onshore - safe from seizure.

Officially, Russia's gold is 30% of its $597 billion reserves, but in terms of accessible assets the share is much bigger as half of Russia's reserves were frozen by Western countries in reaction to Moscow's invasion of Ukraine in 2022.

That precedent, in which Russia's central bank kept access only to investments in yuan-denominated assets and gold, has served as a cautionary tale for China, which has an estimated 60% of its reserves in U.S. dollar-denominated assets, according to analysts.

"The main motivation of the PBOC is to be less dependent on the U.S. dollar and – in an extreme case – to be less susceptible to U.S. sanctions," said Carsten Menke, analyst at Julius Baer.

He expects China's desire to diversify reserves to persist as "the geopolitical tensions between China and the United States are unlikely to disappear anytime soon, independent of the outcome of the U.S. presidential elections."

It took China nine years to raise the share of gold in its total reserves to 4.9% from 1.8% in 2015.

China holds 72.8 million ounces of gold worth about $170 billion. If it eventually lifted the share of gold in its reserves even to 10% at current reserve levels and prices, the purchases would total another $170 billion.

For comparison, Russia's central bank stopped active buying of the precious metal in 2020 when gold reached 20% of its total reserves. Gold's share has since grown due in part to its rising price.

China's Gold Buying Break Seen as Fleeting Given Its Long-Term Needs_3

The PBOC has sometimes reported past gold purchases well after they occurred, according to the World Gold Council, leading analysts to caution the latest statistics may not provide the full picture. China's Gold Buying Break Seen as Fleeting Given Its Long-Term Needs_4

China's Gold Buying Break Seen as Fleeting Given Its Long-Term Needs_4

Source: Reuters

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Data Interpretation

The U.S. Census Bureau announced the following advance estimates of U.S. retail and food services sales for June on Tuesday, July 16:

Retail sales came in at 0% MoM, compared to expectations of -0.3% and the previous 0.3% (revised).

Core retail sales came in at 0.4% MoM, compared to expectations of 0% and the previous -0.1%.

U.S. retail sales in June were unchanged from May, while core retail sales rose 0.4% from a month earlier, the largest increase in three months and above expectations. Of the 13 categories tracked by the Commerce Department, non-store retailers were the biggest contributor to the increase in retail sales in June. In contrast, sales at auto and parts dealers fell sharply.

The strong performance of the data, which shows that all economic activity exceeded expectations in June, suggests resilient consumer spending at the end of the second quarter, running counter to the gradual slowdown in consumer growth in recent months. It dampens market expectations for three rate cuts by the Fed this year and also suggests that U.S. consumers are maintaining their ability to spend in the current economic environment.

June Retail Sales Report

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Daily News

[Quick Facts]

1. U.S. June retail sales won't change expectations for a Sep. rate cut.

2. Israeli PM Netanyahu says he will step up pressure on Hamas.

3. Kugler: Slowing inflation and labor market paves way for rate cuts.

4. Macron accepts French PM Attal's resignation.

5. U.S. presidential election is heating up and billionaires take sides.

6. U.S. NAHB housing market index slips for the third straight month.

[News Details]

U.S. June retail sales won't change expectations for a Sep. rate cut

U.S. retail sales in June were unchanged from the previous month as the decline in sales at auto dealers was offset by general growth in other sectors. It shows the resilience of consumers, thus enhancing the prospects for economic growth in the second quarter. In addition, the May figure was revised upward to 0.3% from -0.6%.

Retail sales rose 2.3% year-on-year in June. It has slowed sharply from 7.7% in January 2023. This suggests that after a period of high inflation, households are cutting their spending in search of cheaper alternatives, which is evident from the earnings reports of major retailers and manufacturers.

As it stands, the current data won't change expectations of a September rate cut by the Fed.

Israeli PM Netanyahu says he will step up pressure on Hamas

Hamas is facing increasing pressure as the Israeli army keeps striking senior Hamas commanders, Netanyahu said at a commemorative event on July 16. The Israeli side will adhere to its position and continue to put up pressure on Hamas to achieve all the war objectives.

A ceasefire agreement would have been likely to be reached this week as Hamas was willing to implement the first phase of the ceasefire agreement and continue negotiations without Israel committing to a "permanent" ceasefire, but Netanyahu added two additional conditions to the negotiations on an ad hoc basis, demanding that the Israeli army not withdraw from the "Philadelphi Corridor" on the border between the Gaza Strip and Egypt, and prohibiting Hamas militants from returning the northern Gaza Strip.

The sources said that Netanyahu sabotaged this ceasefire agreement in order to avoid the collapse of the government, as the far-right Israeli National Security Minister Ben-Gvir threatened to bolt the coalition.

Kugler: Slowing inflation and labor market paves way for rate cuts

More progress in reducing inflation, along with signs of further weakness in the U.S. labor market, would pave the way for a rate cut later in 2024, Federal Reserve Governor Kugler said on Tuesday.

The interest rate decision will rely on upcoming economic data and be evaluated on a meeting-by-meeting basis. If the labor market cools excessively and unemployment continues to rise driven by layoffs, Kugler thinks the Fed should cut rates sooner. Conversely, if upcoming data fail to demonstrate that inflation is continuing to move toward the 2% target, interest rates may need to stay at current levels for longer.

Current labor market conditions are similar to those of the pre-pandemic 2019. The slowdown in the labor market may be due to more layoffs by firms rather than a decrease in job openings.

Macron accepts French PM Attal's resignation

French President Macron announced his acceptance of the collective resignation of Prime Minister Attal and the government he leads on July 16, but he asked that the current government will continue to perform its duties as a caretaker government until a new government is formed. Earlier in the day, Attal held a cabinet meeting at the Elysee Palace presidential palace. As the political group he leads did not win a majority of seats in the French legislative elections, Attal submitted his resignation to Macron on July 8. But Macron asked Attal to stay on temporarily to keep the situation stable.

U.S. presidential election is heating up and billionaires take sides

While this year's U.S. presidential election has seen a string of unprecedented events, one constant has been donor money pouring into campaign coffers. Since the assassination attempt on Saturday, Trump has sucked up so much money. Billionaire Elon Musk has pledged to donate $45 million a month to a new super political-action (PAC) committee backing former President Donald Trump's presidential run.

Despite Biden's disastrous performance in the first election debate, his campaign and the Democratic Party raised a total of $38 million between the debate day and the end of June. George Soros donated $5 million to a major super PAC supporting Biden the day after the debate. Former Google CEO Eric Schmidt and real estate developer Herbert Simon have made hundreds of thousands of contributions to Biden's campaign and the Democratic Party in recent weeks. But others, such as Nifty's Reed Hastings, have said they will withhold the funds unless the Democrats put up another candidate.

U.S. NAHB housing market index slips for the third straight month

The U.S. NAHB housing market index fell for a third straight month in July to its lowest level this year as higher interest rates depressed sales and kept construction financing costs high. A measure of sales expectations for the next six months was one of the few positives, with this forward-looking indicator rising for the first time since March, according to the report. The NAHB's gauges of prospective-buyer traffic and current sales both fell to fresh lows for the year. The data also showed that 31% of builders lowered their home prices in July, compared to 29% who did so last month. For the 13th consecutive month, price reductions averaged 6%, while the percentage of builders using sales incentives remained at 61%.

[Today's Focus]

UTC+8 14:00 U.K. CPI (Jun)

UTC+8 17:00 Eurozone HICP (Jun)

UTC+8 20:30 U.S. Annual New Housing Starts MoM (Jun)

UTC+8 21:00 Richmond Fed President Barkin Speaks

UTC+8 21:35 Fed Governor Waller Speaks on Economic Outlook

UTC+8 02:00 Next Day: Fed's Beige Book

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Alex

Economic

Australia faces the prospect of an economy performing below long-term trends through early 2025 based on leading indicators.

A collection of future-focused data points compiled by Westpac and Melbourne Institute "marginally improved" in June yet the index still signalled lacklustre growth in the second half of 2024 and early 2025.

"While the signal has improved compared with the weak reads seen in 2023, the picture is still one of stabilisation rather than recovery with the index showing no real direction over the first half of 2024," Westpac head of Australian macro-forecasting Matthew Hassan said.

June's leading index comes as CreditorWatch reports rising business failures and the value of invoices held by companies hitting record lows.

The outlook for hospitality businesses was particularly bleak, with the credit reporting bureau now expecting one in 11 businesses to collapse in the next 12 months.

CreditorWatch chief economist Anneke Thompson said small businesses were hurting the most because they were more vulnerable to adverse economic conditions than larger businesses.

"They operate on tighter margins and are less able to take measures to cut costs," Mr Thompson said.

Australia's economic growth outlook has also been trimmed slightly by the International Monetary Fund to 1.4 per cent for 2024 from the 1.5 per cent forecast in April.

Gross domestic product is then expected to expand two per cent in 2025, unchanged from previous forecasts.

The IMF's latest economic assessment lands as economists warn persistent price pressures threaten the Reserve Bank of Australia's inflation fight, which could lead to interest rates staying higher longer.

Much hinges on June quarter inflation data out later in the month, with a strong outcome potentially putting another hike on the table at the August cash rate meeting.

Globally, the IMF's growth projections were unchanged and inflation had slowed enough to be broadly on track for a soft landing.

Yet deteriorating public finances as well as slowing disinflation progress, particularly due to persistent services price pressures, were highlighted as downside risks to the outlook.

A possible escalation of trade tensions was also identified as potential source of bumpiness along the disinflation path, threatening higher costs for imported goods along the supply chain.

"The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal, and financial risks," the report said.

Treasurer Jim Chalmers said the IMF report was a clear reminder the last mile to bring inflation down "can be a bit harder".

"The report rightly highlights that uncertainty in the global economy in areas like international trade are contributing to inflationary pressures all over the world and Australia is not immune to those pressures," he said.

IMF economic counsellor Pierre-Olivier Gourinchas said the gradual dismantling of the multilateral trading system was a key concern.

"More countries are now going their own way, imposing unilateral tariffs or industrial policy measures whose compliance with World Trade Organization rules is questionable at best," he said.

Governments were also urged to rebuild fiscal buffers, with deteriorating public finances leaving many countries "more vulnerable than foreseen before the pandemic", Professor Gourinchas said.

Source: The Canberra Times

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Devin

Central Bank

Economic

The UK faces the prospect of interest rates being higher for longer unless there is more progress in reducing service sector inflation, the International Monetary Fund has warned.

While the Washington-based IMF nudged up its 2024 growth forecasts for the UK, it identified the stickiness of price growth in the service sector as a potential headache for the Bank of England.

The IMF's economic counsellor, Pierre-Olivier Gourinchas, said the UK was similar to the US in having "somewhat persistent services inflation". His comments chime with comments from Bank of England policymakers about the risks of service sector inflation becoming embedded.

Since the start of the year the headline rate of UK inflation has halved to 2% while service sector inflation has fallen from 6.5% to 5.7%. The Office for National Statistics will release the latest cost of living figures on Wednesday.

The IMF said its forecasts for the global economy had not changed much since the release of its world economic outlook (WEO) in April. Its July WEO update left 2024 growth unchanged at 3.2%, while its estimate for 2025 was revised up from 3.2% to 3.3%.

A stronger than expected start to 2024 has resulted in the IMF raising its growth estimate for the UK from 0.5% to 0.7%, while the eurozone was upgraded from 0.8% to 0.9%.

The fund believes UK growth will continue to pick up and has pencilled in expansion of 1.5% in 2025. Elsewhere, the IMF said the growth gap between the US and the EU would narrow over the next 18 months.

Rachel Reeves, the chancellor, said: "While it's welcome that the IMF is forecasting growth to pick up this time, I am under no illusion to the scale of the challenge facing the economy and the inheritance this new government faces. That is why we are already taking the tough decisions to fix the foundations of our economy, so we can rebuild Britain and make every part of our country better off."

While the IMF believes the global economy is on course for a slowdown but not a recession it said the service sector cost pressures were holding up progress in the fight to bring inflation down sustainably.

"As in April, we project global inflation will slow to 5.9% this year from 6.7% last year, broadly on track for a soft landing," Gourinchas said. "But in some advanced economies, especially the US, progress on disinflation has slowed, and risks are to the upside."

Risks of persistent inflation in the services sector were tied to wage and price setting, given that labour accounted for a high share of the costs in that sector. The service sector accounts for about 80% of the UK economy's output.

"Persistently elevated uncertainty around the inflation outlook has led central banks in major advanced economies to become somewhat more cautious about the pace of policy easing, compared with their positions at the end of the first quarter," the IMF said.

The IMF also expressed concern about the potential for significant swings in economic policy as a result of elections this year, with knock-on effects to the rest of the world.

Without singling out any country, Gourinchas said he was worried about mounting protectionism.

"The gradual dismantling of our multilateral trading system is another key concern. More countries are now going their own way, imposing unilateral tariffs or industrial policy measures whose compliance with World Trade Organization rules is questionable at best," Gourinchas said.

"Our imperfect trading system could be improved, but this surge in unilateral measures isn't likely to deliver lasting and shared global prosperity. If anything, it will distort trade and resource allocation, spur retaliation, weaken growth, diminish living standards, and make it harder to coordinate policies that address global challenges, such as the climate transition."

Source: The Guardian

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Owen Li

Commodity

Economic

Indonesia's nickel production surge is crushing competitors and challenging the West's ambitions of diversifying its critical metals supply chains.

Australia's BHP Group is the latest victim of a two-year price slump, which has seen London Metal Exchange (LME) three-month nickel tumble from an all-time high of $55,000 per metric ton in March 2022 to $16,650.

The world's largest listed miner has announced it is suspending its Western Australia nickel operations from October.

The decision was well flagged and probably made easier by the loss of feed from Wyloo Metals' Kambalda mines, which were placed on care and maintenance in May, also due to low prices.

The Australian casualty list includes Panoramic Resources, which went into voluntary administration in December, and IGO Ltd, which has suspended its Cosmos mine and just taken an impairment charge against its exploration assets.

BHP said it would continue investing in what was heralded just a few years ago as a centre-piece of the company's battery metals strategy. But a review of the suspension is promised only by 2027, which says much about how the company views the outlook for the nickel price.

Tesla Inc, which signed an off-take deal for BHP's low-carbon nickel in 2021, will have to look elsewhere. Probably Indonesia. BHP Joins the Lengthening List of Nickel Price Casualties_1

BHP Joins the Lengthening List of Nickel Price Casualties_1

Rising Stocks Weigh on Price

London nickel managed a May rally as high as $21,750 per ton due to civil unrest in New Caledonia, a French-ruled Pacific Island that is the world's third largest producer of mined nickel.

However, a rapid build in LME stocks has damped bullish spirits with investment fund positioning turning net bearish in June.

Metal has been arriving daily at LME warehouses in South Korea and Taiwan since the start of last month with headline exchange stocks now at 99,576 tons, the highest level since January 2022.

There is more sitting in the shadows.

LME off-warrant stocks totalled 67,181 tons at the end of May, according to the exchange's latest monthly report. Combined inventory was already over 150,000 tons at that stage.

Indonesian Flood

Much of the nickel flowing into LME warehouses is Chinese metal following the fast-track approval of five new brands with combined annual output of around 70,000 tons.

Chinese nickel accounted for 28% of total LME on-warrant stocks at the end of June, up from 11% at the start of the year and zero this time last year.

It is Chinese metal produced from Indonesian raw materials such as matte and mixed hydroxide.

Chinese companies have driven Indonesia's build-out of processing capacity and mastered the technology of converting the country's relatively low-grade resource into high-purity products such as refined metal and battery-grade sulphate.

Indonesia may start delivering nickel straight to the LME itself after the country got its first brand approval in May.

The country's production surge was previously confined to the Class II intermediate products segment of the nickel market but it's now filtering into the LME-traded Class I segment.

More metal may be coming. China's Tsingshan, the world's biggest nickel producer, is planning to register a second Indonesian brand with another 50,000 tons of annual capacity.

Hitting The Floor

It's not easy to see why BHP isn't too hopeful about a nickel price recovery any time soon.

It doesn't help nickel's cause that battery demand has failed to live up to exuberant expectations as the electric vehicle revolution hits a speed bump.

The market is in visible oversupply even as the production curtailments mount.

Macquarie Bank identified more than 300,000 tons of closed capacity even before BHP confirmed the wind-down of its Nickel West division.

The bank has trimmed its expected supply-demand balances accordingly but still forecasts sustained annual surpluses through 2028.

Macquarie nickel analyst Jim Lennon argues that prices should be close to a floor, estimating the marginal production cost of converting Indonesian raw materials to metal in a $16,000-18,000 range.

The problem is that it's too low a floor for just about everyone else.

New Dependency

Indonesia accounted for just over half of global nickel production last year, a ratio that could rise to 75% in 2028, according to Macquarie.

This particular battery metal supply chain is rapidly becoming ever more concentrated on Indonesia and the Chinese operators that control large swaths of its nickel sector.

The United States and the European Union have been reluctant to engage with Indonesia due to the dominant Chinese presence and the nickel sector's heavy environmental footprint.

That may be changing, however, as efforts to diversify are frustrated by the hard reality that a few existing operators and small number of new projects can compete with Indonesia's low cost of production.

U.S. Under Secretary of State for Economic Growth, Energy, and the Environment Jose Fernandez has been in Jakarta this week and one of the items on the agenda was the possibility of Indonesia joining the multinational Mineral Security Partnership (MSP).

The MSP, whose objective is to accelerate development of sustainable critical minerals supply, would be an opportunity to improve environmental standards and governance in Indonesia's mineral sector, Fernandez told a press conference in Jakarta.

It's clear that any closer engagement is going to be dependent on Indonesia cleaning up its environmental act and ideally switching away from carbon-heavy coal power to run its nickel processing plants.

But both sides seem to be edging towards some sort of minerals deal intended to help Indonesia reduce its dependency on Chinese capital and technology.

For the United States and its allies on metals, it's an admission that all nickel roads currently lead to Indonesia and will continue doing so for some time.