World Gold Council Says Demand from China May Double Sooner than Expected

By Damon van der Linde – Exclusive to Gold Investing News

The World Gold Council (WGC) says China’s growing demand for the precious metal may double sooner than its original prediction of 2020 as both private and institutional investors move to increase their holdings as a hedge against international inflation concerns.

“The momentum is very strong and with what we’ve seen over the last few quarters, we would not be surprised if our forecast that we predicted last year could be achieved in a shorter period of time,” said Eily Ong, Investment Research Manager at the World Gold Council and author of the 2010 ‘Gold in the Year of the Tiger.’ “China has strong economic growth, rising income, and a high savings rate, so we believe that because of the limited availability of investment products in China, together with gold’s low volatility, low corrective correlation with other assets, and ongoing strong fundamentals, it has increased its appeal among Chinese investors.”

The World Gold Council reported that demand for the precious metal in China is growing faster than any other market, driven by emerging interest both by private demand and institutional investors, which has not been seen until quite recently.

“At the moment, what we’re seeing is a lot of catching up of gold consumption from the private consumers and also what we’re seeing is that there’s going to be fresh demand coming from institutional investors. There’s a huge momentum coming from these two categories of consumers,” said Ong.

Ong says that the increase in Chinese gold demand from private consumers is growing to a large extent in the jewelry sector. This is quite unique from Western Europe and North America, where gold jewelry demand has decreased in recent years, she added.

“Jewelry demand is categorized as an investment because the majority of Chinese gold jewelry is in the form of 24 karats, which is almost 100 percent gold. So they look at jewelry demand not only as an adornment but also as an investment,” said Ong. “At the moment, jewelry demand is still depressed in the US and Europe because of the slow ongoing economic growth in these regions, the lower GDP growth and the unemployment issues.”

Another major shift in gold demand from China is the growing interest coming from institutional investors. In August 2010, the People’s Bank of China (PBC), China’s central bank, released its global financial report where it publicly expressed a positive view on gold investment, suggesting that demand will be supported by ongoing high inflationary expectations in Western Europe and North America, as well as instability in the Middle East and North Africa. Official figures for China’s gold holdings are based on data released by the People’s Bank of China, which may only represent a portion of actual purchases. In April 2009, the PBC announced that it had increased its gold holding to 900 tons, though the PBC is not the only central bank to increase its holdings in gold as this trend can be seen in many emerging economies, including Mexico, Thailand, Venusuela and Vietnam. The China Investment Corporation (CIC), a sovereign wealth fund responsible for managing part of the People’s Republic of China’s foreign exchange reserves, has also picked up 1.45 million shares of the SPDR Gold Trust since February 2010.

“[Gold investment] for Chinese institutions is still relatively new,” said Ong. “I think that the market will be surprised by the strong momentum but we believe that this trend is actually ongoing. Based on my personal belief, I think it’s actually a growth in structural demand. For example, Xia Bin, who is an advisor to the central bank, has called for China’s central bank gold reserve to be increased to maintain the savings of the central bank and to hedge against any depreciation of foreign reserves that they have in the central bank itself.”

As reported last week in Gold Investing News, the Hong Kong Mercantile Exchange recently began trading gold futures on its electronic platform as a move to appeal to Asian investors looking to trade in a geographically closer market. The World Gold Council also suggests that China’s implementation of a very liberal gold import structure could facilitate an expansion of Chinese demand for the yellow metal.