SMM: recent signs show that the new crown epidemic in China has been basically brought under control.

Since the outbreak of the new crown epidemic, China's gold investment demand in the first half of the year has benefited from continuing concerns about economic growth and a reduction in the opportunity cost of holding gold after the central bank cut interest rates.

But as signs of a sustained domestic economic recovery emerge, will gold's attractiveness as a strategic asset fade in China? We think the answer is no.

In 2020, gold has been the main dancer in China's investment market.

The Xinguan outbreak has had an unprecedented negative impact on China's economy. Restrictions taken to control the spread of the epidemic led to a basic shutdown in most industries in the first quarter. The result was a 6.8% year-on-year decline in GDP in the first quarter, the biggest quarterly decline on record.

This unforeseen contraction has made many investors who are not bullish on China's economic growth even more pessimistic, directly boosting their demand for safe-haven assets such as gold. As a result, gold outperformed any other major asset class in the Chinese market in the first half of 2020.

Looking back at the first half of 2020, Chinese investors' demand for gold increased significantly.

In order to mitigate the economic impact of the epidemic, the people's Bank of China and the Ministry of Finance have introduced various easing policies, reducing benchmark policy interest rates and increasing the broad money supply.

The decline in the opportunity cost of holding gold, coupled with concerns about currency devaluation in the current environment, has pushed up the allocation of gold by Chinese investors, as a direct example: China's total gold ETF position increased by 11.6 tons (about 4.6 billion yuan) in the first half of 2020.

Meanwhile, the average daily trading volume of Au (tuned D), a contract that reflects domestic gold investment demand, reached $5 billion in the first half of 2020, 45 per cent higher than the average in 2019.

-under policy support and epidemic control, China's economy is rebounding

Although strict isolation measures to prevent and control the epidemic in February pushed economic growth to a historic low, China's economy has gradually shown signs of recovery in the past few months. As of May, more than 90% of Chinese companies had returned to work, according to the Ministry of Industry and Information Technology. As the pace of getting back to work accelerated, key economic indicators such as China's purchasing managers' index (PMI) and industrial output rebounded significantly after February.

Loose fiscal and monetary policies have laid the foundation for economic recovery. Since the outbreak at the end of January, in addition to injecting liquidity directly into the financial and banking system through various monetary policy instruments, the people's Bank of China has cut the base rate of (LPR) for one-year loans by 30 basis points.

In addition, in order to support economic growth this year, the government has also taken active fiscal policy measures, such as expanding the budget deficit in 2020 and issuing trillions of yuan worth of new crown bonds.

-China's economic recovery and gold demand can still be supported.

To explore the potential impact of economic recovery on gold, let's first review the four drivers of gold demand, namely:

Among the four main drivers of gold demand, rising risks and uncertainties, as well as the falling opportunity cost of holding gold, have been supporting Chinese investors' demand for gold, which has been further amplified by the positive momentum of gold prices.

While the economic recovery is likely to boost investor confidence and undermine gold's attractiveness as a safe haven, it is also expected to boost consumer incomes.

Our analysis shows that the growth of consumer spending is positively related to the sales of gold ornaments, bars and coins in China. This also provides support for gold's long-term stable performance, offsetting possible weakness in other areas of gold demand.

But we don't think gold's appeal as a hedge will fade in the current environment:

As many key demand indicators, such as retail consumption, remain weak, China's economic recovery remains to be seen.

It is too early to rule out the possibility of repeated outbreaks and another blow to fragile economies.

Taking the above factors into account, China may continue to adopt loose monetary and fiscal policies. As stated in the government work report released at the end of May, throughout this year, China will strive to accelerate the growth of broad money supply and total financing scale. therefore, the reduction of opportunity costs and public concerns about currency devaluation are still expected to be medium-and long-term drivers of China's gold investment demand.

-the diversity of gold demand is the basis of its long-term solid performance.

In challenging times, the diversity of gold demand is crucial. The role of gold as a strategic asset is also more critical for investors seeking risk aversion. In fact, despite the negative impact of the outbreak on other gold demand, such as gold jewellery and technology, strong investment demand increased global gold demand by 1 per cent in the first quarter compared with the same period a year earlier.

If China's economic recovery continues, domestic gold jewelry sales, gold used by the technology industry and long-term savings demand for gold will improve.

With the continuous boost of confidence in financial markets, the attractiveness of gold as a safe haven asset will inevitably decline, but the potential improvement in consumer demand for gold in this economic environment may offset the weakening of safe haven demand for gold to some extent.

The diversity of gold demand sources makes it an effective investment risk diversification tool and contributes to the improvement of gold performance in the long run. According to our recent report on the investment value of gold as a strategic asset, in the medium to long term, the return on gold denominated in RMB can be comparable to that of the domestic stock market and higher than that of domestic bonds and commodities.

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