Spot gold price drops $50 per ounce as China’s central bank halts gold reserve building

Spot gold price drops $50 per ounce as China’s central bank halts gold reserve building

According to Bloomberg, China's central bank increased its Spot Gold reserves for the 18th consecutive month in April, though its pace of buying slowed as prices hit record highs.

The People's Bank of China (PBOC) has been one of the biggest gold buyers for years, steadily accumulating bullion since 2022. However, gold's steep rally since mid-February, with repeated all-time highs in April and May, dampened demand.

In April, the PBOC purchased 60,000 troy ounces of gold, down from 160,000 ounces in March and 390,000 ounces in February. Now in June, apparently no more buying is taking place, leading to a sharp drop in the precious metal price.

In the first quarter (Q1), central bank purchases, led by China, reached record levels according to the World Gold Council. Some analysts suggest gold's 14% year-to-date surge has been partly driven by institutional buyers, likely central banks.

Central banks tend to be long-term strategic accumulators. Moreover, gold buying by institutions in emerging markets still has significant room to run, even if China has stopped its purchases at current elevated levels in the gold price for now.

Aside from central banks, gold has also been supported by increased demand from Asian investors, especially in China, where appetite has been sharpened by an underperforming economy and lacklustre markets. Heightened geopolitical risk amid conflicts in Ukraine and the Middle East has also bolstered safe haven buying over the years.

Spot gold technical analysis

The spot gold price, which had been on track for a third straight day of gains and reached a two-week high at $2,387.78 per troy ounce on Friday morning, slid by around $40 as the PBOC stopped its gold purchases.

A bearish engulfing pattern is potentially in the process of being formed but will only become a valid pattern once Friday’s candle has been fully formed and the market is shut. If, however, a daily chart close below Thursday’s open at $2,353.50 were to be made on Friday, the technical picture would become short-term bearish.

Spot gold daily candlestick chart

The first downside target is made up of the 55-day simple moving average (SMA) and the February-to-June uptrend line at $2,329.86 to $2,329.25, ahead of this week’s low at $2,314.80. Were this level to give way, a slide towards the psychological $2,300 mark and possibly the early May low at $2,277.35 may ensue.

Only a fall and daily chart close below the $2,277.35 May trough would have medium-term bearish implication as in this scenario a double top chart pattern would be formed.