"Stop Buying Gold"... Why the Steady Rise in Gold Prices Suddenly Halted

Chinese Government Cracks Down on Gold Purchases by the Wealthy via Banks
Gold Price Rally Stalls Since April as Demand Drops
Funds Shift to Bitcoin as an Alternative Risk Hedge
Rising Manufacturing Boosts Demand for Silver and Platinum

According to the New York Mercantile Exchange, international gold prices have risen steadily from the $1,800 range per troy ounce at the beginning of last year to the $3,300 range in April this year. Looking at the overall trend, since April this year, the upward movement has paused, and prices have been fluctuating sideways. What caused the previously steady rise in gold prices to come to a halt?

On July 18, Daishin Securities released a report titled "Bitcoin and Silver Blocking Gold Amid Liquidity Expansion," analyzing that the Chinese government has restricted individual investors from buying gold, causing funds to flow into Bitcoin and silver instead.

In the first half of this year, Chinese individual investors purchased as much as 63 tons of gold through gold spot ETFs. This is 30 times the amount of gold purchased by the People's Bank of China (PBOC), the country's central bank. The inflow of personal funds into gold, which does not generate added value, rather than into stocks or real estate, negatively impacts the government's economic stimulus efforts. In response, starting in May, the Chinese government instructed commercial banks to crack down on gold purchases made through credit card cash advances and unsecured loans. As wealthy Chinese stopped buying gold, the upward momentum in international gold prices also began to lose steam.

Traditionally, gold is a risk-hedging asset that wealthy individuals accumulate when they distrust governments and central banks. Alternatives include Bitcoin, silver, and platinum. However, gold prices tend to rise when expectations for interest rate cuts build (as central banks increase their gold purchases), whereas Bitcoin rallies when liquidity is actually injected into markets. When liquidity truly expands, as it did in August 2020 during the global pandemic, gold's hedging demand inevitably shifts toward Bitcoin.

Silver and platinum, like gold, are risk-hedging assets, but at the same time, they are also cyclical assets, with 58% and 68% of their demand coming from manufacturing, respectively. As a result, their prices tend to rise just before the manufacturing PMI (Purchasing Managers' Index) rebounds. In times like now, when central banks are cutting policy rates and liquidity is expanding, the increased liquidity lifts the global manufacturing PMI. The PBOC plans to inject additional liquidity (from $1.3 trillion to $1.5 trillion), while the US Federal Reserve is preparing to ease the Supplementary Leverage Ratio (SLR) regulation, encouraging investment banks to leverage $4 trillion to $6 trillion.

Choi Jinyoung, an analyst at Daishin Securities, explained, "The rebound in manufacturing is the reason silver and platinum have started to outperform gold," and added, "During a liquidity-driven market, preference for safe assets shrinks, so it is inevitable that the price of gold, a traditional safe asset, will adjust down to $3,000 per ounce."