As with many commodity markets, Chinese demand is a driving force in the gold market. China is the largest producer of gold (last year extracting 340.9 tonnes of the metal) and until 2007 it was largely self-sufficient, since then however, demand has been steadily outpacing supply, forcing China to import progressively more gold. Last year, imports are estimated (no official numbers are released) to have been over 200 tonnes, after stripping mine production and recycled gold from the total demand.
China is fast becoming the new India, the world’s most enthusiastic gold consumer. Indian households are estimated to hold more than 18,000 tonnes of gold, and the Chinese private sector is estimated to own around 5,000 tonnes. The trend is certainly up; first quarter demand was up 47 percent from last year to 291.8 tonnes. Jewellery is by far the biggest source of demand, accounting for 64 percent of gold purchased last year, followed by investment demand (27%) and then industrial/technological use (9%). Since 2001, gold demand has grown at an average of 14 percent per annum, and has accelerated in recent years. China is now the world’s top market for physical bar and coin investment.
Over the past few years, the Chinese government has made it a lot easier for everyday citizens to accumulate gold, possibly in an effort to increase the country’s total holdings without triggering a big price spike through heavy purchases by its central bank. The central bank holds one of the world’s largest stockpiles at 1,054 tonnes as at the last disclosure (these numbers may not be accurate given the source), but as a percentage of assets it is a mere 1.6 percent. In absolute terms, China holds roughly one-tenth the amount of gold as the Euro zone countries, and roughly the same amount as Switzerland. In its latest report, the PBOC expressed a positive view on gold demand.
Chinese culture is in some ways very similar to Indian culture, particularly with regards to gold. The yellow metal is associated with good luck, and it is considered auspicious to give gold as a gift when a child is born, on birthdays, and as part of wedding jewellery. As the middle class grows, so too does the domestic market for gold; in 2005 just 15 million households made more that US$4,300 per annum, which is expected to increase to 75 million households by 2015. Considering the curbs the Chinese government has put in place to cool speculation in the housing market, and the limited supply of other investment opportunities, investment demand for gold should continue to rise apace.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.