A Glittering Year For China’s Gold Bugs

Demand for gold in China shot up by 20% last year, according to the World Gold Council’s latest Gold Demand Trends report. Some of that reflects a long-standing Chinese affection for the metal; some a newer obsession with all things conspicuously luxurious. The Council says Chinese consumers bought 510.9 tonnes of gold jewelry in 2011, worth $25.8 billion and a 13% increase over the previous year (the global market shrank 3%). China surpassed India as the world’s largest market for gold jewelry in the second half of last year, the Council says.

The fastest growing demand for the metal in China came from investors, however. Only a slither of that is likely accounted for by the People’s Bank of China. Globally, central banks more than quintupled their net gold buying last year from 2010′s levels, to 439.7 tonnes, to diversify their foreign exchange reserves and reduce exposure to the travails of the two main reserve currencies. However, China’s is not among the eight central banks the Council names as prominent official buyers, with Mexico and Russia’s accounting for nearly half of net purchases.

Instead it was individual Chinese, now able to buy more easily through both the official exchange in Shanghai and unofficial exchanges in other big cities, that were the driving force behind China’s investment demand in 2011. In a year that saw the gold price hit a record of $1,895 an ounce in September before falling back, consumers bought a record volume of 258.9 tonnes of gold bars and coins, worth $12.9 billion, up 38% on 2010′s purchases. Domestic investors saw gold both as a traditional hedge against the year’s high inflation and as a better alternative than stocks, property or cash savings in an uncertain year. The appreciation of the currency meant the metal’s price rose by only 4.3% in yuan terms over 2010 compared to its 8.9% rise in dollar terms.

With the gold price pulling back 15% from its record high, authorities cracking down on illegal trading and inflation moderating, will China’s gold bugs be as bullish in 2012? “Signs of economic slowdown in China, and the increasing maturity of the market, are likely to result in a deceleration of recent growth rates, evidence of which was already coming through last quarter,” the Council warns.

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