China's central bank gold reserves end 18 consecutive increases, gold bulls are scared! Will the gold price outlook face a major upheaval?

On Friday, in the European market, before the crucial release of the US May non-farm data, the precious metals market suddenly moved, and spot gold and silver both plunged, as China's central bank maintained its gold reserves unchanged last month. Gold continued to fall, with a daily drop of 1.5%, breaking through the $2,340 mark. Silver fell more than 2.5% during the day.

The People's Bank of China stated that China's gold reserves at the end of May were 72.8 million ounces, unchanged from the end of April, ending a trend of 18 consecutive months of increasing gold reserves.

As gold prices have repeatedly hit historical highs this year, China, the world's largest gold consumer, has shown signs of slowing down in gold demand. Previous customs data showed that China's overseas physical gold purchases in April fell to 136 tons, a 30% decrease from the previous month, the lowest for the year.

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Although gold prices are greatly influenced by US interest rates, the recent strength of gold prices is largely due to strong buying from Chinese consumers. China's central bank has also shown a sustained interest in gold to achieve diversification of reserves. Therefore, any slowdown in its imports may cause gold bulls to pause and think.

Soni Kumari, a commodity strategist at ANZ Banking Group Holdings Limited, said that demand in China will remain strong in 2024, but imports in the most recent quarter may tend to be flat.

In addition, the Chinese government has warned against excessive speculation, further weakening the appeal of gold. As the latest initiative to curb market risk-taking behavior, the Shanghai Gold Exchange has repeatedly raised the margin requirements for some contracts. The exchange's latest announcement stated that during the Dragon Boat Festival in 2024, the margin ratio for some contracts such as gold T+D was increased to 11%.

Forexilve analysts said that in the short term, traders may be frightened by headlines from China. "I mean, in my view, after soaring above $2,400, gold still needs a deeper adjustment. However, the low point of $2,314-15 in early June is still a valid support. Therefore, the recent decline is not enough to indicate a major technical shift in gold," he said.

Market analyst Giuseppe Dellamotta believes that in his view, the decline in gold is more related to the current market narrative, and the specific news of China's suspension of gold purchases is not the real root cause. In fact, investors have heard a lot about gold prices soaring due to purchases by China and Russia in the past, so the risk of this driving factor fading has triggered a negative reaction.

He also pointed out that algorithmic trading may have exacerbated the market sell-off, and the current gold price has approached the lower limit of the daily fluctuation range. Generally speaking, unless there is a very strong catalyst, prices will not exceed these levels too much. Therefore, this may be a good opportunity for bargain hunters.The market is currently closely watching the release of the U.S. non-farm employment data in the evening, and is ready to deal with the possibility that job growth may be lower than the median forecast of economists - 185,000.

IG market strategist Yeap Jun Rong said: "Given that the inflation process is basically stagnant around 3%, it may require a significant decline in labor conditions to convince the Federal Reserve to cut interest rates ahead of schedule. Any weakening of labor market data could drive up gold prices."