Analysts expect the People’s Bank of China to return to buying gold soon

The People’s Bank of China chose not to add any gold to its reserves in September, bringing the streak of inactivity to five months in a row, according to official data published Monday.

China's gold holdings remained at 72.8 million troy ounces, or 2063.84 metric tonnes, at the end of last month. However, the value of its gold reserves rose to $191.47 billion as of Sept. 30, up from $182.98 billion at the end of August, because of the yellow metal’s appreciation.

The People’s Bank of China had purchased gold every month for 18 consecutive months until they first refrained in May.

WisdomTree commodity strategist Nitesh Shah told Reuters that he believed the central bank would like to hold more gold but is waiting for “a more attractive entry point.”

"However, with global interest rates falling and geopolitical tensions rising, it looks like they may have to wait for some time for a price dip,” he added. “Given our forecast of prices rising to over $3,000/oz in the coming year, the central bank may want to consider building positions earlier.”

When the People’s Bank of China broke its 18-month streak of net gold purchases in May, it sent shockwaves through the gold market and caused a sharp selloff when traders realized that one of the pillars of the yellow metal’s rally was now on hold.

While the People’s Bank of China has refrained from additional purchases, analysts at Capital Economics said the pause in gold accumulation is only temporary as “China’s gold rush has much further to run” amid rising global tensions, economic uncertainty, and ongoing efforts to move away from the U.S. dollar.

“Against the backdrop of central bank buying, strong physical gold demand, and a surge in ETF holdings, China appears to have been a key driver of the rally in gold prices earlier this year,” they said. “Looking ahead, we think that China’s appetite for gold will grow as its economy slows down this decade. This will put upward pressure on gold prices and could be a greater source of volatility in gold markets over the coming years.”

While Capital Economics sees a higher level of demand in the decade ahead, in the near term, they said the People’s Bank of China may continue to pause further purchases until gold price retreats from record highs.

“A combination of cyclical factors point towards gold demand in China weakening in the near term,” they warned. “Higher prices are already weighing heavily on jewelry demand, fiscal stimulus should provide a much-needed lift to the economy, and we expect stock market performance to pick up given that local equities seem lowly valued to us.”

“Bringing all this together, the attractiveness of gold relative to other assets will probably fall, and ‘safe-haven’ demand for gold in China is likely to ease,” they said.

However, they expect the pause will only be temporary.

“Further ahead, though, we expect China’s demand for gold to strengthen and put significant upward pressure on prices over the rest of the decade,” the analysts said. “This is largely because we think fiscal stimulus will only delay, rather than prevent, the impending property-led economic slowdown. This will weigh on the performance of investment alternatives to gold, thus boosting the metal’s appeal as a safe store of value.”