How to understand the central bank's suspension of gold purchases in May?

Investment Highlights In May, the People's Bank of China temporarily halted the purchase of gold, with China's official gold reserves remaining at around 72.8 million ounces (approximately 2264 tons). Due to market concerns about the weakening logic of higher gold prices following the central bank's gold purchases, as well as the significantly better-than-expected US non-farm payroll data in May (expected 180,000, actual 272,000), the price of gold experienced a certain adjustment. We believe the reason for the central bank's temporary halt in gold purchases lies in price sensitivity. When central banks purchase gold, they will consider the price of gold to a certain extent. In 2024, the price of gold rose by 11.14%, reaching a historical high. After consecutive record highs in gold prices, there is a certain price sensitivity among buyers, leading to a temporary weakening in central bank gold purchases. Historically, the trend of gold prices tends to rise after the People's Bank of China stops buying gold, rather than a shift in market sentiment as feared. Historically, after the People's Bank of China stops increasing its gold holdings, there have been varying degrees of upward trends in gold prices in 2002, 2009, 2019, and 2022. Therefore, to some extent, the increase in gold holdings by the People's Bank of China can be seen as "buying the dip" (see Chart 1 for details). We believe the underlying logic behind the current rise in gold prices lies in the instability of the US credit monetary system + expectations of an increasing US deficit rate, both reinforcing each other and unlikely to end in the short term. With the US May non-farm payroll data exceeding expectations, it is expected that the period of high interest rates will be relatively prolonged, with the cost of fiscal financing remaining high. Coupled with the impact of military spending due to geopolitical disturbances, there is a high probability of a continuous increase in the deficit rate in the short term, fundamentally supporting the upward trend of gold. Although the People's Bank of China's suspension of gold purchases in May and the significantly better-than-expected US May non-farm payroll data have somewhat dampened the bullish sentiment in the trading market, causing a certain degree of price adjustment, we believe that the overall logic behind the current rise in gold prices remains unchanged. In addition, although the Fed's interest rate cut has been postponed, it is not off the table, and market participants are expected to accelerate their entry into gold in the future. The current upward trend in gold is far from over, and we still expect gold to rise above $3000 per ounce. Authors: Li Shuaihua, Yang Fengyuan; Source: China Post Securities; Original Title: "How to Understand the People's Bank of China's Temporary Halt in Gold Purchases in May?" Li Shuaihua SAC Registration Number: S1340522060001 Yang Fengyuan SAC Registration Number: S1340124050015