There is a long history of gold ownership in China. Gold's centuries-old popularity in the country for jewelry, payments and dowry gifts ended in 1949 when the Communist Party took power. The metal was declared to be a bourgeois symbol and gold mines became state owned.
Gold prices were set by the state until 2002 when the Shanghai Gold Exchange opened and domestic prices began tracking international prices more closely. So for more than 50 years, the government controlled China's gold market and set prices. But now, the precious metal has reemerged as a popular hedge among ordinary citizens against inflation and currency movements.
China is already the world's largest gold mining country. Now it is on the cusp of surpassing India as the world's biggest gold importing nation too. Just look at the figures from 2011.
China's imports of gold from Hong Kong more than tripled last year from 2010's 119 tons, hitting a record of 428 tons. Demand did slow a bit in December ahead of the holiday season, but in November demand was brisk at 103 tons. The figures are a great proxy for China's overall gold imports. China does not release official data on gold imports or demand.
Signs of physical demand for gold in China are strong. The Chinese New Year period (the biggest gold buying period of the year) just ended and Beijing stores reported sale increases of 50-60 percent from last year's holiday season.
The Shanghai Gold Exchange also announced one of its busiest months ever in January. Daily trade volumes averaged 12.2 tons per day, up from 10.3 in December and only 6.4 tons in November.
Metals traders at Chinese banks say that total imports last year were at least 30 percent higher than the Hong Kong figures indicated once shipments from other countries, such as Switzerland and Singapore, were taken into account.
Nikos Kavalis, commodities strategist at RBS, cites good fundamental reasons behind the surge in Chinese gold imports. The reasons he points to include inflation fears - after five straight months of decline, Chinese inflation rose to 4.5% in January - and Chinese savers' (unlike most Americans) preference for hard assets to protect against financial mishaps due to government malfeasance or market meltdowns.
Another reason for the uptick in gold imports last year cited by other analysts is that China may be continuing to diversify its official reserves away from the U.S. dollar and toward other currencies, including gold.
Whatever the reason, Chinese gold imports in 2012 are expected to continue growing as physical demand remains robust. Gold has risen about 11% so far this year and is trading at approximately $1730 an ounce. Demand coming from China should continue to be very supportive of the gold price, but it may not be enough to push it through the $2000 mark.
Investors can play the gold price through ETFs such as the SPDR Gold Trust (NYSE: GLD.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.