The latest report from UBS's precious metals team indicates that recent in-depth discussions with multiple market participants in China led to the conclusion that gold demand from China is highly likely to persist.
Influenced by the combined effects of spillover risks from Middle East conflicts, a deteriorating global macroeconomic outlook, and expectations of a weaker US dollar, the overall sentiment among respondents is cautious. However, there is near-unanimous expectation for a medium- to long-term upward trend in gold. The bank noted, "Most, if not all, of our conversations displayed a bias towards higher gold prices over the medium to long term."
Macroeconomic concerns are acting as a catalyst for gold demand. The report reveals that Chinese market participants are highly vigilant regarding the impact of the Middle East situation, with an overall quite pessimistic sentiment.
Respondents generally believe that the negative shocks from the global macroeconomic outlook have largely been priced in. Even if a window of easing emerges between the US and Iran, it would be difficult to fundamentally alter this assessment in the short term. Most respondents maintain a cautious stance on the US outlook, focusing on stagflation risks and a weaker dollar. Simultaneously, they are skeptical about global central banks quickly pricing in interest rate hikes, preferring instead to focus on the substantive impacts of high energy prices and geopolitical uncertainty on economic growth.
These multifaceted worries regarding growth, inflation, and geopolitics form the underlying rationale for the sustained bullish view on gold in the Chinese market.
Institutional demand is accelerating. Changes on the demand side are not solely driven by sentiment; structural factors are also pushing institutional capital into the market. UBS identified three primary drivers.
First, adjustments to tax rules. New regulations introduced last year continue to exempt investment gold from taxes while increasing the tax burden on jewelry gold. The new policy stipulates that standard gold traded on the Shanghai Gold Exchange and the Shanghai Futures Exchange will continue to be exempt from value-added tax.
Second, the expansion of bank accumulation plans. Banks are actively promoting gold accumulation plans on a large scale through electronic platforms, with coverage continuously expanding and participation thresholds for retail investors further lowering.
Third, an acceleration in insurance company pilots. This is the most noteworthy incremental information in the report. Currently, about half of the insurance companies participating in the pilot program—which allows them to invest up to 1% of their Assets Under Management in gold—have begun active positioning.
The trading activity of these insurance companies will be reflected in the trading volume of the Shanghai Gold Exchange, "as this is the product they are permitted to trade." Data supports this view, with SGE volumes showing a noticeable increase in recent weeks.
UBS believes the current positioning by insurance companies is still in its early stages, "with considerable distance to go before full allocation is reached." Medium-sized insurance companies and some institutions with higher risk appetites are expected to be the most active participants in the near term. For insurers who remain hesitant, a lack of expertise and the fact that gold does not generate yield are the two main obstacles.
Long-term upside risks stem from two directions: expanding the pilot to more industries or sectors, and increasing the upper limit on the proportion of AUM allowed for gold investment. Should these policies materialize, they would open up greater space for gold demand.
Short-term volatility has not shaken medium- to long-term confidence. It is noteworthy that the sharp correction in gold prices at the end of February and the continued weakness in March have sparked a degree of concern in the Chinese market.
UBS stated, "Nearly every conversation we held in China involved reasons for the pressure on gold prices," indicating that market participants are clearly re-evaluating underlying assumptions and long-term prospects, with "apprehension being palpable."
The core question remains: Is the current price level an attractive entry point, or is there still room for patience?
Despite this, UBS maintains a constructive outlook for the second quarter as a whole, particularly if gold prices stabilize and the domestic premium holds. On the supply side, no significant bottlenecks are currently apparent, with access to import quotas and licenses remaining relatively smooth.
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