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The Bullion Report

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October 13, 2010 in 'The Bullion Report'

China & GoldChina & Gold

10-13-10

Gold & China


Boasting a population of well over one billion people and wielding the second largest trading power in the world, China’s participation in gold markets is worth closer scrutiny. Their rules and approach to the physical metals markets, as well as investment markets, can turn whole tides of sentiment just because of the country’s sheer size. In the last decade, the burgeoning middle class in China, as well as India, was viewed as a catalyst for the higher price movements for other commodities, so let’s take a look at how this view may roll into the precious metals sphere.

 
Past performance is not indicative of future results.
***chart courtesy Gecko Software’s Track n’ Trade Pro

To suggest China is among one of the largest and most powerful industrialized nations would be an understatement. Sheer size and population aside, it is also home to nearly 50 of the Fortune Global 500 companies for 2010, has four of the world’s most valuable companies, and boasts one of the world’s largest exchanges. It is not unreasonable, therefore, that eyes turn towards Asia whenever there is consideration for the demand side of any commodity or financial instrument.

China’s history with gold has been about as colorful as any other nation’s. Ancient rulers knew the value of a little of the shiny metal for ornament or currency (although there has been some debate about the possibility that ancient texts are actually referring to copper, and that China may have been gold poor.) As of the second quarter of 2010, the World Gold Council (WGC) was reporting that the People’s Bank of China is proposing development of the gold market within China. The WGC sees “huge potential” for gold ownership there.

The government in China has loosened restrictions on gold ownership following a history of stringent policies regarding precious metal holdings for private citizens. On an official front, the nation does not release tallies of gold imports, but the estimated gold reserves in China are not bountiful compared to other spots in the world. According to the Ministry of Industry and Information Technology, China’s gold output was 6 percent higher year on year, totaling 127.34 tons in for January through May. This could mean that a push towards adding to gold holdings – private and national – could mean higher imports. The internal gold lobby in China has pressed Beijing to increase the gold portion of national asset reserves.

Gold currently represents about 1.6 percent of the People’s Bank of China’s total holdings. There has been no official statement from the bank regarding the notion of adding to these reserves but the WGC suggests that if their holdings were boosted to just over 2 percent gold, it would provide another 400 tons of gold demand.

On the private front, gold demand has grown around 13 percent on average per year. Around 50 percent of this demand has fallen to jewelry purchases, and another 30 percent was for investment. The WGC is forecasting that overall demand for gold will jump from $14 billion in 2009 to $29 billion by the year 2020. As of the second quarter of 2010, gold demand in China has already gained 26 percent year on year. It reached over 111 tons, putting China firmly behind India in terms of the highest rate of gold consumption.

These images from ChinaGoldSummit.com help illustrate some of the growth in precious metals investment interest:

 

Past performance is not indicative of future results.

 

Past performance is not indicative of future results.

Besides government holdings and citizen investment in jewelry, there has also been talk of the potential for China to launch ETFs or gold funds. Reuters recently reported that “at least two companies have filed with authorities in China to come out with gold funds.” If these funds are backed by significant stores, or if they flourish and grow exponentially, they could point to bigger interest in precious metal investment in the Asian nation. Other ETFs already helped push the gains for the overall investment segment of demand, providing a 118 percent gain year on year. The total investment demand for gold was 534.4 tons and ETFs represented 291.3 tons of that number.

Summary

China may have a large total volume of assets held in reserve but the evidence suggests that they have room to grow. The fraction of gold as a part of those reserves is far lower than that of other nations. Per capita, China’s private citizens also appear to have plenty of potential for adding gold. If the desire for gold continues, and China can maintain a solid pace of development, low unemployment, and prosperity for the average citizen, than it is conceivable that they could continue to acquire gold and help light another demand-fed rally under precious metals. This would hold especially true if their US dollar interests decline. This could come if the dollar is devalued by further intervention efforts aimed to bolster or sustain recovery from the recent economic collapse.

Civilized countries generally adopt gold or silver or both as money. - Alfred Marshall



 


Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.