China supports gold
Many consider China to be the global driver of gold demand. It seems that the demand-oriented fluctuation in precious metals, especially gold and silver, comes from Asian countries including India and China. Over the years, China has become the world’s leading gold consumer.
Chinese banks use gold as collateral for loans. Such services are primarily designed to increase the liquidity of precious metals in the market. Liquidity remains the essence of financial market trading. Gold, platinum, and silver are all eligible to be pledged under such loans.
Gold holdings for reserve
China’s authorities have been instrumental in supporting the growth of the domestic bullion market. The creation of key gold market institutions like the Shanghai Gold Exchange and the China Gold Association is another step for promoting gold markets.
Chinese authorities have also shown a keen interest in gold buying. The central bank and other state institutions have been purchasing gold, and they may invest in gold priced in US dollars, as it demands higher liquidity.
Despite such massive calls for gold in China, its gold holdings as a percentage of total reserves remain as low as 2%. However, it’s trending upward since PBOC’s (People Bank Of China) decision to disclose the reserves to the IMF. With the initiation of the yuan gold fix, the amount of gold held as a reserve may increase.
The changes in US dollar-denominated gold are often seen in the returns of mining funds. These funds include the VanEck Vectors Gold Miners ETF (GDX), the Sprott Gold Miners (SGDM), and the Velocity Shares 3X Long Gold (UGLD).