Developing nations are frequently the focus when it comes to commodity demand. Amidst the chaos of the Euro zone crisis, and the uncertainty facing other Western powers, it's not unusual that the spotlight should fall on them again. As dealers ramp up their bullion sales ahead of the Lunar New Year, let's take a fresh look at China's gold demand.
Past performance is not indicative of future results.
***chart courtesy of Gecko Software
China’s importance to the world economy is demonstrable. The Chinese economy has fueled a lot of global business with annual growth near the 10% range. The current pace of growth has slowed, with many economists now predicting China's rate of real GDP growth will be closer to 5%. This slowdown is no surprise considering the current global economy. The extent of that impact will be felt in reduced demand for commodity related investments, and a slow down of exports, but not so for gold. Since the onset of the current economic slowdown, the Chinese have displayed an increased appetite for the yellow metal, both for jewelry and as an investment.
To appreciate the potential impact of gold demand in China consider the World Gold Council (WGC) reporting that, "demand for gold bars and coins in China expanded by 24 percent from a year earlier." Chinese gold jewelry demand increased by 13 percent to where China has now overtaken India as the world’s largest for gold jewelry. The WGC anticipates, "strong demand in investment and jewelry will drive China's total gold demand to 750 tons this year." Additionally, the Chinese government is thought to be increasing their gold holdings as they grow cautious of the increasing risks in foreign exchange stemming from international liquidity problems as countries turn to more aggressive monetary easing.(1)
In response to increased jewelry demand, retail jewelry chains in China have expanded. Stores are opening new locations in smaller cities to take advantage of that increasing demand, which is fueled by rising income levels. According to Dow Jones, even superstar investor George Soros is getting into the act, buying $40 million worth of shares in the IPO of Chow Tai Fook Jewelry Group Ltd. That investment is especially worth noting as Mr. Soros not only is a high profile investor, he has also been attributed with saying gold was the “ultimate asset bubble” nearly two years ago. His investment in Chow Tai Fook shows that Mr. Soros is potentially willing to place a bet on the Chinese demand for gold expanding.
Besides jewelry, the other area where gold purchases have shown an increased involvement by the citizens in China is noted by recent increased investment regulation. During the last week of December China made official the decision to regulate all gold trading through official exchanges in Shanghai. The increased regulation isn’t expected to dampen citizen demand for bullion. Instead it was made in an effort to force unauthorized trading platforms to close. The purpose is to obtain a better handle on safeguarding what has become a major market for investor demand as disposable income levels have risen.
Chinese citizens, for the most part, purchase gold, but are not active traders. Seldom do typical Chinese investors play the short side of the gold market. In fact, in China the gold buy-back businesses see little traffic. Buyers hold the gold they buy as a long term investment. With China experiencing rising incomes and inflation concerns, investment in gold is becoming more widespread among citizens, and according to Hong Kong analysts gold investments will grow.
This increased scrutiny in the gold market is welcomed. The action by the government came about due to requests by Chinese brokerages. They requested tightened oversight of gold exchanges as they grew concerned that gold investors were being exposed to a very volatile gold market and were apt to become caught in dysfunctional markets just as the popularity of precious metals is growing. The new rules are meant to prevent trading anywhere other than on the official exchanges in Shanghai and comes on the heels of a year where prices moved substantially. While the volatility in gold prices continues, unauthorized trading platforms will no longer be legal forums able to proliferate along with the boom in precious metals.
Only a week into the Western New Year the price range in gold has been dramatic, with most of it on the upswing. While the US and other Western nations clean up from their New Year's celebrations, China and other Eastern countries prepare for theirs on January 23 - the Lunar New Year. It is expected that this season will bring increase demand for bullion and jewelry. This is attributed to an increase in disposable income levels, and the belief that gold is a good store of value during difficult times.Summary
China has been grappling with inflation issues, which should continue to fuel the demand appetite for gold and other precious metals. This paired with increasing geo-political unrest due to potential military conflict with Iran can only benefit the drive for gold investments. Ongoing concerns over a Euro zone collapse add more fuel to the fire. Lured by global volatility, Chinese purchases of physical gold are on the rise, and will likely show resilience in the new year to come.
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.