According to an article published in the Financial Times yesterday, China has started to curb gold imports in order to limit capital outflows. Lacking official confirmation, banks with import licenses said their quotas had been reduced as of late.
Considering China’s intention to become a global gold trading hub and that demand is down more than 40% over the past three years, the news is very surprising. While gold is an easy way for the Chinese to swap renminbi for dollars, its contribution to capital outflows appears very small.
According to our calculations, China’s gold import bill is around $35bn this year and compares to an estimated capital outflows of more than $600bn.
The news does not help to improve sentiment in the gold market, which is facing headwinds from a stronger dollar, rising bond yields and accelerating investor selling. With holdings of physically backed gold products still on elevated levels, investor selling remains the biggest downside risk to prices at the current point in time.
While this risk has increased with prices breaking below $1,200 per ounce, we still believe that a short-term sideways trend remains the most likely scenario for gold. It should be supported by a consolidation of the dollar and bond yields. Medium to longer-term, gold should resume its downtrend, pushed lower by receding growth risks, gradually rising interest rates and a stronger dollar.
The news of China curbing gold imports is very surprising considering weakening demand and its intention to become a global trading hub. That said, it does not help to improve sentiment in the market, which is facing headwinds from a stronger dollar, rising bond yields and accelerating investor selling.
Carsten Menke is commodities research analyst at Julius Baer