Banks in China have been importing less gold over the past month as demand waned after the festival season, while cheaper prices at home due to a softer yuan also curbed overseas purchases of the precious metal, banking sources and traders said.
A significant drop in import volumes by China, which overtook India as the world's top gold consumer last year, could hurt global prices of the metal that fell 3 percent in March as investors shifted money to better-performing equities.
"Volume has fallen quite a bit partly due to the weakness in yuan," a source at a bullion bank in China said, declining to be named as he was not authorized to speak to the media.
"In the last four weeks, we have seen pretty poor demand."
The yuan depreciated 2.5 percent in February and March, its biggest two-month loss since China established the domestic foreign exchange market in 1994.
The weaker currency dragged on Shanghai gold prices, which flipped into a discount to global spot rates in early March, with the spread widening to $10 an ounce at one point from a holiday-demand-driven $20 premium earlier in 2014.
Overseas purchases by banks have faded after the Lunar New Year that was on January 31, before which they had loaded up on the metal that is a popular choice for gifts.
Banks are reluctant to bring in more gold into the country at a time when demand is soft and a weak yuan would force them to take losses on any sales, the bank source said.
A few banks are also sitting on some stock that they had imported earlier when the yuan was stronger and which they are now holding on to due to the cheaper domestic rates.
"They are waiting for prices to turn positive to offload the metal that they have got on hand. That is also limiting the amount of gold being imported at the moment," the source said.
Another banking source said the cost of importing and delivering gold into China was between $2.50-$3 an ounce and that premiums would have to be higher than that for banks to start buying aggressively again.
Chinese gold prices are currently trading at about $1,284 an ounce, compared with spot prices of $1,286.
In 2013, China imported a record 1,158.162 tonnes of gold from Hong Kong - the main conduit for gold into the mainland, as demand was boosted by a 28 percent drop in global prices.
Buying from China has been able to help offset to some extent the massive outflows from bullion-backed exchange traded funds (ETFs) in the West, as the ETF bars are being recast and sent to China to meet demand for jewellery, bars and coins.
Analysts had warned that China's imports this year would not be able to match last year's record levels as volatility in prices could affect buying interest.
"Quite often you would see that Chinese demand is price sensitive. For example, when prices fall $20-$30, you will see decent bids out of Asia for physical bars. But that hasn't been the case for a while now," said one Hong Kong-based trader with an international bank.
"With premiums having been negative for a while, it is financially not an incentive to bring fresh metal into China."