JP Morgan: If gold prices remain at current levels, the likelihood of the People's Bank of China pausing purchases in June is 70%

JPMorgan Chase believes that as gold prices remain high, the probability of the People's Bank of China (PBOC) pausing gold purchases in June has significantly increased. This expectation, combined with the potential easing of US-China trade tensions, may lead to a short-term correction in gold prices.

According to news from the Wind Trading Desk, JPMorgan Chase analysts, including Avery Chan, stated in their latest research report that the PBOC's gold purchases in May slowed to 60,000 ounces, the same level as before the pause in purchases at the beginning of 2024. If gold prices remain at current levels, the likelihood of a pause in purchases in June has increased to about 70%.

With the expectation that US-China trade tensions may ease, JPMorgan Chase believes that gold prices face correction risks in the short term. However, based on the trend of de-dollarization and continued purchases by global central banks, JPMorgan Chase remains optimistic about gold in the medium to long term.

Probability of PBOC Pausing Gold Purchases Rises to 70%

JPMorgan Chase's analysis of three purchasing cycles since 2018 shows that the monthly gold purchase volume by the PBOC has a constant elastic function relationship with the monthly average gold price.

It is noteworthy that the central bank's sensitivity to gold prices has become less elastic in this cycle—every 1% increase in gold prices results in only a 6% decrease in purchase volume, compared to 12% during the cycle from November 2022 to April 2024. JPMorgan Chase believes this indicates that, given the ongoing trade tensions 2.0 and the trend of de-dollarization, China has adopted a more strategic stance on its gold reserves.

Regarding the decision to pause gold purchases, JPMorgan Chase infers that the PBOC has an implied minimum purchase level in this cycle, estimated at about 60,000 ounces, which is the same level as when the PBOC stops purchasing in 2024:

Although the central bank has the autonomy to continue purchasing gold when prices are high, the lower the purchase volume indicated by the demand function relative to the minimum purchase level, the greater the likelihood that the PBOC will pause gold purchases and begin to adjust its demand curve with updated directives.

According to JPMorgan Chase's estimates, if gold prices remain at current levels, the likelihood of the PBOC pausing purchases will increase to about 70%, compared to 50% in May and 31% in April.

JPMorgan Chase expects that the pause may last from six months to three years, after which the central bank will begin a new purchasing cycle.

Short-term Correction Risks for Gold Accumulate, but Long-term Outlook Remains Positive

Although JPMorgan Chase remains optimistic about long-term gold prices, it believes that short-term downside risks are accumulating. In addition to US CPI and non-farm employment data, the easing of US-China trade tensions and the potential pause in gold purchases by the PBOC are seen as two major risk factors.

Historical experience shows that when the data on the central bank's pause in gold purchases is announced, gold prices typically drop by about 3% on average and maintain a range-bound fluctuation for 1 to 1.5 months before regaining long-term growth momentum.

Considering that going long on gold is a relatively crowded trade, JP Morgan believes that if China suspends gold purchases and trade tensions ease, gold prices could fall below $3,200 per ounce to $3,100. Then, as market sentiment returns to a more neutral level, it would be a good time to buy gold on dips.

JP Morgan remains positive on the medium to long-term outlook for gold. According to estimates from JP Morgan's global commodities team, if 0.5% of foreign holdings of U.S. assets were shifted to gold, it could drive gold prices to $6,000 per ounce by early 2029