The sudden shake up in China’s equity market has pushed more Chinese investors into the tried-and-true gold safe haven, potentially supporting bullion-related exchange traded funds.
Year-to-date, the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) have dipped about 1.0%.
However, after the plunge in Chinese stocks, with the Shanghai Composite in correction territory, more anxious investors have shifted into safe-haven gold.
Specifically, China’s gold imports through Hong Kong surged 36% month-over-month and 35% year-over-year to the highest level since January, reports Dhara Ranasinghe for CNBC.
“We think investors are becoming increasingly worried about a more pronounced correction in China’s stock market and will return to gold to diversify their portfolios,” Simona Gambarini, commodities economist at Capital Economics, said in a note.
The Shanghai Composite index experienced its largest single day decline in five months, falling over 7.4%, as investors exited positions on fears that the bull run may have been overdone.
Prior the the recent pullback, the rising Chinese equities market coincided with falling bullion demand. Net gold imports from gold declined to 52.2 tonnes in April from 66.4 tonnes in March.
However, with the Chinese equities market declining, the trade off may reverse and demand for gold could continue to rise.
“The sharp rise in the local equity market in China is likely to have weighed on gold demand in the past few months,” Gambarini added. “However, investors might be seeking once again the safety of gold, as recent gains in the stock market are deemed unsustainable.”
Capital Economics also projects gold demand from China and India, the two largest gold consumers, to rise by 8% and 11% year-over-year, respectively, which could help boost gold prices to $1,400 per ounce. COMEX gold futures were trading at around $1,174 per ounce.
Additionally, other market observers argue that concerns over the ongoing Greek drama may also support safe-haven gold demand as well.
“The shining metal is gaining its shine back and in the process of obliterating its biggest weekly decline since March,” Naeem Aslam, chief market analyst at AvaTrade, said in a note. “That’s’ thanks to Greece uncertainty, which is throwing a lifeline for the safe haven.”
SPDR Gold Shares
For more information on the gold market, visit our gold category.
Max Chen contributed to this article.