China's Paper Gold Ban Redirects Investment to Physical Gold

YLG assesses that China's move to halt Paper Gold trading for retail investors will not materially constrain global gold markets but will instead channel funds into physical bullion, strengthening long-term demand amid ongoing central bank purchases and keeping gold in an upward trend with scope for new all-time highs. On July 30, Thibha Nawawattanasup, CEO of YLG Bullion and Futures Company Limited, revealed that at least seven major Chinese commercial banks terminated retail services for trading precious metal products on the Shanghai Gold Exchange (SGE) on July 24, including Paper Gold products such as spot gold and leveraged deferred gold contracts, as well as silver futures and platinum spot. China's policy shift aims to reduce systemic financial risk, curb excessive speculation, and redirect liquidity toward physical assets for economic stability, forcing retail investors and speculators to close Paper Gold positions and causing minor short-term price volatility in global markets. However, the policy's impact may be more limited than anticipated for several reasons: retail trading through SGE agents represented only 4.88% of total gold volume as of June; new retail accounts have been frozen since late 2020 with existing positions declining; the market had a full month to absorb the announcement issued between June 24–30; and a comparable case—Chinese banks ending retail oil products after 2020—did not significantly affect global oil prices, as these are derivative products, not price drivers. China has simultaneously relaxed criteria for its long-term gold accumulation plan, suggesting the policy goal is shifting retail behavior from speculation to savings. Without Paper Gold liquidity, all demand will be compressed toward physical bullion, driving long-term prices higher under basic supply-and-demand mechanics as global supply remains limited but demand stays robust, especially from central banks. The world's largest market players—global central banks—according to the World Gold Council's four-year data, have been accumulating gold at an average 1,000 tons annually, a marked increase from the prior decade's 500 tons per year. This aggressive accumulation reflects geopolitical uncertainty and fragile global economics, with 89% of central banks expecting their gold reserves to increase over the next 12 months, signaling strong demand and supporting the long-term bullish outlook. China's customs report shows gold imports of approximately 173 tons in June, the highest in two years and marking the third consecutive monthly increase, reflecting sustained buying momentum.