More Gold Buying From Arabia Than China?

| About: SPDR Gold (GLD)

The latest report from the World Gold Council, ‘Gold in the Year of the Tiger’, concludes that Chinese gold consumption could double in the next decade if its economy continues to grow at a rapid pace.

China is presently the world’s second largest gold consumer after India with 11 per cent of global demand. Last year China consumed more gold than it produced: 423 tonnes versus 314 tonnes with investment and jewelry the main sources of demand for the yellow metal.

1970s gold boom

But in the 1970s gold boom the Middle East was the market that drove gold prices higher and higher. The region is still a huge gold market and consumed 250 tonnes last year, admittedly down 28 per cent on the year before due to the economic recession that hit Gulf expatriates especially hard.

However, it is one thing to read the official statistics about gold. The real market for physical gold is quite different both globally, and locally in the Middle East.

In November 2008 ArabianMoney reported on a record $3.5 billion purchase of gold by Saudi Arabian investors (click here). Many of these gold deals go unreported and are metal deals between individuals, often of very substantial size.

Rumors of gold hoards buried in the Arabian desert may not be so wide of the mark. But the scope for con men to hone such stories into believable investment opportunities is legendary, and due diligence is called for in any such transaction.

What certainly seems to have happened among the super-rich of Arabia is that gold has become very popular as a safe haven asset without third party risk. In the wake of global banking and investment crises and scandals, the absence of a third party is particularly desirable.

Gold as money

In short, there is nobody between you and your money. Gold is money. The recent rally in global stock markets has also been treated with much skepticism in Arabia. It would be surprising if investors here emerged as net buyers of global equities rather than sellers into this rally.

It would also not be surprising if Arabian investors were secretly amassing gold hoards, and just doing it on the quiet to avoid sending the price up when news of their massive transactions emerged.

Could it be that gold buying from Arabia will outpace China in the future, if it is not already actually doing so behind closed doors? It is perfectly possible, especially if the Chinese economic miracle proves to be yet another bubble waiting to burst.

Disclosure: Long physical gold, silver