Gold prices saw their biggest drop in over two years as China’s central bank paused its gold buying after an 18-month spree. This halt comes as the People’s Bank of China (PBOC) decided against adding to its gold reserves in May, marking a significant shift that has sent ripples through global markets. This unexpected move coincided with robust U.S. job data, which dampened hopes for imminent rate cuts by the Federal Reserve.
The immediate market reaction was pronounced. Spot gold prices fell 1.5% to $2,342 per ounce following the news, and at one point, the metal’s price dropped by as much as 3.1%, marking the most significant decline since March 2022. Base metals also took a hit, with copper and zinc experiencing substantial intraday declines.
The U.S. government’s May employment report revealed stronger-than-expected job growth, with 272,000 new jobs, while the unemployment rate unexpectedly rose to 4%. This led to a surge in Treasury yields and the dollar, causing gold to slump as much as 3.1%, its largest drop since March 2022. Ole Hansen, head of commodity strategy at Saxo Bank, explained, “A strong jobs report reversed a great deal of the rate cut excitement that had built during the past week. This report removes hopes for earlier rate cuts, with sticky wage growth and robust employment in need of high rates to cool.”
China’s Buying Pause
China’s central bank, the People’s Bank of China (PBOC), did not purchase any gold in May, marking the end of its extensive buying spree that started in November 2022. This pause contributed to a 1.5% drop in spot gold prices. The PBOC had been significantly increasing its gold reserves to diversify its assets and safeguard against currency depreciation amid rising geopolitical tensions. “My initial thought is that China, a major driver of the gold rally in the past year, is nowhere near done buying gold,” said Ole Hansen. “The pause shows that they are balking at the prospect of paying record-high prices.”
Gold prices soared to a record high above $2,450 an ounce in May, supported by strong central bank buying. The PBOC’s demand played a crucial role in this rally. In the first quarter of 2024, central bank purchases hit record levels, with China being the largest buyer, according to the World Gold Council.
However, signs of cooling demand emerged in recent months. The PBOC’s gold purchases dropped from 390,000 ounces in February to 160,000 ounces in March, and further down to 60,000 ounces in April. The country’s gold imports in April also fell by 30% from the previous month. “China’s voracious appetite for bullion has left the precious metal vulnerable to any potential shift in demand,” noted Nicholas Frappell, global head of institutional markets at ABC Refinery in Sydney.
Following the PBOC’s announcement, spot gold traded at $2,309.23 an ounce in New York, down 2.8% from the previous close. The S&P/TSX Composite Gold Index dropped as much as 5.2%. Silver, platinum, and palladium prices also tumbled, with silver experiencing its biggest intraday drop since August 2021.
Despite the current dip, analysts remain cautiously optimistic about gold’s long-term outlook. Ole Hansen remarked, “Overall, gold is still consolidating and the news will likely prolong that phase, but overall the long-term bullish outlook has not changed.”
The spot gold price, which had been on track for a third straight day of gains, slid by around $40 as the PBOC stopped its gold purchases. A bearish engulfing pattern is potentially forming, indicating a short-term bearish outlook if the daily chart closes below Thursday’s open at $2,353.50. The first downside target is the 55-day simple moving average (SMA) and the February-to-June uptrend line at $2,329.86 to $2,329.25, ahead of this week’s low at $2,314.80. A fall below the $2,277.35 May low could indicate medium-term bearish implications.
China’s halt in gold buying reflects a strategic move to avoid high prices, despite its long-term goal of diversifying its reserves away from the U.S. dollar. The PBOC now holds approximately 2,257 tons of gold, but this accounts for only about 4% of its total reserves, leaving room for future purchases once prices stabilize.
