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India and China account for 52% of global gold demand

|Includes: Sprott Physical Gold Trust (PHYS)
2011-AUG-22

Gold bullion Global gold demand experienced a sharp setback in the second quarter (Q2) of 2011 compared with the same period of last year. This announcement came as something of a surprise, juxtaposed as it was on the recent leap in gold prices and the worsening economic problems affecting countries around the world. The World Gold Council (WGC) reported last Thursday that global gold demand fell to 919.8 tonnes from 1,107 tonnes year-on-year, representing a decline of 17%.

China and India continue to be the world's largest buyers of gold. Both of these countries are experiencing rapid increases in prices, something which is encouraging domestic investors to buy gold and silver. Despite rate increases by the People's Bank of China and several successive hikes in reserve requirement ratios for China's domestic banks, the country's inflation rate has continued to rise in recent months. For this reason, it is no surprise that China and India cumulatively accounted for 52% of global gold demand in Q2, as the WGC data show. While the average gold price jumped 26% in Q2, gold demand rose by 38% in China and by 25% in India respectively year-on-year.

The report stated further that the WGC expects future gold demand to be strong in both countries. China's persisting inflation will likely prove to be one of the main drivers of Asia's gold demand in the foreseeable future. Furthermore, important Indian festivals, such as Diwali – the festival of lights – are just around the corner. Indians traditionally use the occasion to give precious metals to family members, friends and relatives. Experts believe that this year's season will provide Indian gold and jewellery dealers with new sales records.

India's gold imports could reach 950 to 1000 tonnes this year, according to Prithviraj Kothari – president of the Bombay Bullion Association. Rising Indian gold imports are likely to offer sustainable support for the yellow metal's future price development. According to the WGC, gold transactions increased by 5% in value terms to $44.5 billion year-on-year, which is the second highest transaction value that has ever been reached. Nevertheless, global investment demand for gold suffered a setback in the reporting period – declining by 37% year-on-year. Gold demand reached a record of 574.2 tonnes among capital market investors in the second quarter of 2010, but this number dropped to 359.4 tonnes in Q2/2011.

The data suggests that speculative buyers may have used the run-up in gold prices to take profits. But the WGC still remained optimistic on gold. Not only Europe's escalating debt crisis, but also the intractable economic problems in the United States are offering key support to the gold price, and are likley to encourage more and more people around the world to buy gold.