China’s Covid-zero policy, Indian weddings give a polish to gold


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Gold isn’t behaving quite as you’d expect right now.


U.S. interest rates have risen by half a percentage point so far this year, as measured by the yield on 10-year government debt. That’s typically bad news for precious metal. About two-fifths of gold demand comes from private investors and central banks who regard it as a safe place to park their savings. When interest rates are close to or below zero, as they have been across the world for much of the past two years, no one is very worried that you don’t get a dividend, coupon or interest payment from your investments in coins and bars. When things start to tighten, however, people shift their funds into assets that get a better return.


That doesn’t seem to be happening, however. The yellow metal has mostly traded sideways since the start of the year, and a typical negative correlation between the two assets — where higher Treasury yields beget lower gold prices, and vice versa — has disappeared altogether. Geopolitical tensions around Ukraine might be part of the explanation, but a look at the somnolent levels of volatility in Chicago-traded commodity options suggests traders aren’t paying that much attention to the news at present.


Gold chart 1


Switching Sides


Here’s an alternative hypothesis: Metal is being propped up by the spending habits of Asian consumers.


Indian jewelry buyers nearly doubled their purchases last year to 611 metric tons, according to the In mainland China, consumption jumped 63% to 675 tons. The 556 tons of extra trinkets bought in those two countries alone was enough in 2021 to offset almost all of the 558 ton decline in net consumption from private investors and central banks, driven by the fastest sell off from exchange-traded funds in eight years.


It’s far from obvious that this rise in demand has played out. Many of the things that Chinese consumers used to buy are off the table at present. They spent $255 billion on foreign travel in 2019, but the country’s Covid-zero policies meant that outbound tourist numbers last year ran at about a quarter of those levels. The vast majority in the region don’t expect things to return to normal until 2024 or later.


Gold chart 2


Glittering Prizes


While retail sales last year grew at their fastest rate since 2013, they still haven’t returned to their pre-Covid trend, either, despite the fact that the gap between the disposable income and consumption spending of urban households continues to widen. Stock remain confident that this parsimony will eventually give way to extravagance. The forward valuations of pricey liquor-maker Kweichow Moutai Co. and Chow Tai Fook Jewellery Group Ltd., a Hong Kong retailer with thousands of mainland outlets, remain at elevated levels, suggesting investors see little prospect of a decline in earnings.


The picture isn’t all that different in India, despite a less aggressive campaign to crack down on Covid. Gold imports more than doubled last year as weddings and celebrations put on hold by the pandemic started to return in droves. A longstanding rule of thumb that Indian gold demand slumps whenever the price rises above about 30,000 rupees per 10 grams seems to be well and truly dead. After two years well in excess of those levels, per-capita gold demand last year was running at its highest level since 2017.






Gold chart 3


New Normal


All of that is likely to make the direction of gold even harder to predict in the future than it normally would be. The most price-sensitive gold players — private investors in bars, coins and ETFs — have been retreating from the market in recent years, with last year’s net purchases their lowest since 2015. In their place are a growing army of jewelry-buyers who aren’t making a sober calculation of their returns, but are driven instead by motivations not easily caught in economic statistics: optimism, confidence, even love. That’s likely to put a floor under demand, and prices, for some time to come.

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