Demand for gold in China is expected to weaken in the first quarter of 2020 as the country’s consumption-led economy grapples with the novel coronavirus outbreak, the World Gold Council (WGC) said. 

The virus, which first struck in Wuhan, has so far infected more than 70,000 mostly in China, with the death toll exceeding 2,000. 

Juan Carlos Artigas, investment research director at WGC, commented, “How it plays out is yet to be determined but, in our view, it is all but certain that China’s consumer demand will ease. Q1 demand may contract by at least 10 per cent to 15 per cent if history serves as a guide. Whether demand rebounds or continues to soften will depend on the duration of the epidemic and its impact on economic growth.”

The WGC official drew comparisons from the SARS epidemic in 2003, which had a huge impact on China’s gold demand.

Data from GFMS Refinitiv, Metals Focus and WGC showed that Chinese jewellery demand is seasonal, with the first and fourth quarters being traditionally strong and the second quarter generally weak. 

“Chinese jewellery consumption contracted more than expected during the 2003 epidemic – roughly by an additional 10 per cent to 15 per cent,” continued Artigas.

It’s also worth noting that massive progressive changes have occurred in China since 2003.

The Chinese economy represented US$1.7 trillion in 2003 compared to an estimated US$14.3 trillion in 2019. As a crucial component of the global economy, China contributes close to 15 per cent of world gross domestic product (GDP) today from 3 per cent in 2003. In addition, Chinese GDP has markedly changed from being investment-driven to consumption-led, the WGC official said.

China’s gold market has likewise evolved, with consumer demand accounting for 30 per cent globally in 2019, making it the largest gold market, from 8 per cent in 2003. 

“These changes to the size and makeup of the Chinese economy and the gold market have relevant implications on the likely effect of Covid-19,” noted Artigas. “For example, the fact that Chinese GDP includes a higher contribution from consumption means that GDP may suffer more than it did in 2003 given the reduced economic activity it has already experienced so far this year.”

In the same vein, softer Chinese growth is likely to affect the global economy and increase investor uncertainty, which may support flight-to-quality flows into gold – in China and abroad, added WGC. 

"If the situation is resolved relatively quickly and the global impact is contained, the outcome may be limited to softer Chinese gold demand and a transient impact on price. If the epidemic spreads further and continues to affect investor sentiment, global flight-to-quality flows, amidst concerns of a global deceleration, may have a more sustained (positive) impact on the gold price," Artigas remarked.