UBS: Gold Demand from China Will Continue

A recent report from the UBS Precious Metals team indicates that UBS's recent in-depth discussions with numerous market participants in China have led to a consistent conclusion: demand for gold from China is highly likely to persist.

Influenced by the spillover risks from Middle Eastern conflicts, the deteriorating global macroeconomic outlook, and expectations of a weakening dollar, the overall sentiment among respondents is cautious. However, there is a near-unanimous expectation of an upward trend for gold prices in the medium to long term. The bank noted, "Almost all, if not all, of our conversations show an upward bias for gold prices in the medium to long term."

Macroeconomic Concerns Fuel Gold Demand

The report shows that Chinese market participants are highly vigilant about the impact of the situation in the Middle East, with a generally pessimistic sentiment.

Respondents widely believe that the negative shocks from the global macroeconomic outlook have largely been absorbed. Even if a window of easing were to appear between the US and Iran, it would be difficult to fundamentally alter this assessment in the short term.

Most respondents hold a cautious view on the US outlook, with concerns focused on stagflation risks and a weakening dollar. Concurrently, they are skeptical about central banks globally rapidly pricing in interest rate hikes, preferring to focus on the substantive impact of high energy prices and geopolitical uncertainties on economic growth.

These multiple concerns regarding growth, inflation, and geopolitics are the underlying logic behind China's sustained bullish sentiment on gold.

Accelerating Release of Institutional Demand

Changes in demand are not solely driven by sentiment; structural factors are also propelling institutional capital into the market.

UBS has identified three main drivers:

First, adjustments in tax regulations. New rules introduced last year continue to exempt investment gold from taxes, while increasing the tax burden on jewelry gold.

According to Shanghai Securities News, the Ministry of Finance and the State Administration of Taxation jointly issued an announcement regarding tax policies related to gold. The relevant regulations will be implemented from November 1, 2025, until December 31, 2027. The new policy stipulates that standard gold traded through the Shanghai Gold Exchange and the Shanghai Futures Exchange will continue to be exempt from value-added tax.

Second, expansion of bank accumulation plans. Banks are extensively promoting gold accumulation plans through electronic platforms, broadening their coverage and further lowering the entry threshold for retail participants.

Third, acceleration of insurance company pilots. This is the most noteworthy new information in the report. Currently, about half of the insurance companies participating in the pilot program, which allows them to invest up to 1% of their Assets Under Management (AUM) in gold, have begun actively allocating capital.

These insurance companies' trading activities will be reflected in the trading volumes of the Shanghai Gold Exchange (SGE), "as this is the product they are permitted to trade." Data supports this assessment – trading volumes on the SGE have risen significantly in recent weeks.

UBS believes that the current allocations by insurance companies are still in their early stages, "still a considerable distance from full deployment."

Mid-sized insurance companies and some institutions with higher risk appetite are expected to be the most active participants in the near term. For insurance companies that have remained more cautious so far, the lack of specialized knowledge and the fact that gold does not generate income are the two main obstacles.

In the long term, upside risks come from two directions: first, the expansion of the pilot program to more industries or other sectors; second, an increase in the AUM proportion limit for investable gold. Once these policies are implemented, they will open up greater space for gold demand.

Short-Term Volatility Does Not Shake Medium to Long-Term Confidence

It is worth noting that the sharp pullback in gold prices at the end of February and the continuous weakness in March have caused some concern in the Chinese market.

UBS stated, "Almost every conversation we had in China involved various reasons for the pressure on gold prices," and market participants are clearly re-examining their underlying assumptions and long-term outlook, with "evident tension."

The core question is: are current price levels an attractive entry point, or is there still room to wait patiently?

Despite this, UBS maintains a constructive view on the overall outlook for the second quarter, particularly if gold prices stabilize and domestic premiums remain. Supply-side bottlenecks are also not currently apparent, with smooth acquisition of import quotas and licenses.